ON - Interest Rates - 2017The province of Ontario charges and pays interest on underpayments and overpayments of tax at rates prescribed by statute and set at the beginning of each calendar quarter. The rates levied and paid f...

ON - Province releases July jobs figuresThe provincial government has announced that employment in the province grew by 25,500 jobs during the month of July. Most those were full-time positions, while approximately 8,000 were part-time jobs...

ON - Interest Rates - 2017The province of Ontario charges and pays interest on underpayments and overpayments of tax at rates prescribed by statute and set at the beginning of each calendar quarter. The rates levied and paid f...

ON - Province announces rent increase cap for 2018The Ontario government has announced that, effective for the 2018 calendar year, a cap of 1.8% will apply for purposes of rent increases on residential rental property in the province. That cap, which...

ON - Minimum wage to increase in two stagesThe province of Ontario has received the final report of its Changing Workplaces Review panel, which examined the province’s current employment standards laws. Following that review, a number of...

ON - Date announced for 2017-18 BudgetThe Ontario Minister of Finance has announced that the province’s 2017-18 Budget will be brought down on Thursday April 27, 2017.
The Budget date announcement can be found on the Ontario Financ...

ON - Interest Rates - 2017The province of Ontario charges and pays interest on underpayments and overpayments of tax at rates prescribed by statute and set at the beginning of each calendar quarter. The rates levied and paid f...

ON - Province issues updated deficit projectionOntario’s Ministry of Finance recently issued its report on the province’s 2016-17 Third Quarter Finances.
The report indicates that Ontario is projecting a deficit of $1.9 billion for 20...

ON - Personal tax credit amounts for 2017The province has announced the personal income tax credit amounts which will apply for the 2017 taxation year. They are as follows:
Basic personal amount ……………&nbsp...

ON - Interest Rates - 2017The province of Ontario charges and pays interest on underpayments and overpayments of tax at rates prescribed by statute and set at the beginning of each calendar quarter. The rates levied and paid f...

ON - Interest Rates - 2016The province of Ontario charges and pays interest on under and overpayments of tax at rates prescribed by statute at the beginning of each calendar quarter. The chart below sets out the credit and deb...

ON - Upcoming changes to provincial minimum wageEffective as of October 1, 2016, Ontario’s minimum wage will increase from the current rate of $11.25 per hour to $11.40 per hour. The minimum wage rate payable to students under the age of 18 w...

ON - 2016 Individual Tax Rates and BracketsEffective January 1, 2016, the provincial tax rates and income thresholds for Ontario are as follows:
$0 to $41,536 – 5.05%;
$41,537 to $83,075 – 9.15%;
$83,076 to $150,000 – 11...

Bank of Canada leaves interest rates unchangedIn its regularly scheduled interest rate announcement made on December 6, the Bank of Canada indicated that, in its view, no change is required to current rates. Accordingly, the bank rate remains at ...

Unemployment rate down in NovemberThe most recent release of Statistic’s Canada’s Labour Force Survey shows a slight decline in the overall unemployment for the month of November. That rate declined by 0.4%, to 5.9%. The N...

T4127 for 2018 payroll deduction amounts releasedThe Canada Revenue Agency has issued the 2018 version of its publication T4127(E), Payroll Deductions Formulas. The guide is intended for use by payroll software providers and by employers which manag...

Inflation rate up by 1.4% in OctoberThe most recent release of Statistics Canada’s Consumer Price Index (CPI) shows an inflation rate of 1.4% for the month of October, as measured on a year-over-year basis. The equivalent rate for...

Finance launches pre-budget consultationsFinance Canada has begun the consultation process leading to the release of the 2018-19 federal Budget.
As part of that budget consultation process, the Minister of Finance is holding in-person publi...

Employment Insurance premium rates for 2018The federal government has announced the premium rates and maximum insurable earnings amount which will be in place for the 2018 calendar year.
The premium rate for the year for employees has been se...

Slight increase in unemployment rate for OctoberThe most recent release of Statistics Canada’s Labour Force Survey shows a very small increase in the overall unemployment rate for the month of October. That rate was up by 0.1 percentage point...

Bank of Canada leaves interest rates unchangedIn its regularly scheduled interest rate announcement made on October 25, the Bank of Canada determined that no change was needed to current rates. Accordingly, the bank rate remains at 1.25%.
In the...

Inflation rate up slightly in SeptemberThe most recent release of Statistics Canada’s Consumer Price Index shows that the overall rate of inflation for the month of September, as measured on a year-over-year basis, stood at 1.6%. The...

Small business tax rate to be reducedFinance Canada has announced that the federal small business tax rate, which is currently set at 10.5%, will be reduced in two stages.
The first reduction will be effective as of January 1, 2018, whe...

CRA policy on taxation of employee discountsEmployees who work in the retail sector frequently receive a discount when purchasing goods sold by their employer. Recent press reports have indicated that the Canada Revenue Agency (CRA) had or woul...

No change in unemployment rate for SeptemberThe most recent release of Statistics Canada’s Labor Force Survey indicates that, for the month of September, employment across Canada was substantially unchanged.
For that month, the unemploym...

Obtaining a proof of income statementIndividual Canadians are sometimes required to provide proof of their income, often as part of an application for a mortgage or other form of credit. Such proof of income can be obtained from the Cana...

Prescribed interest rates for 2017The Canada Revenue Agency (CRA) has announced the interest rates which will apply to amounts owed to and by the Agency for 2017, as well as the rates that will apply for the purpose of calculating emp...

Increased inflation rate in AugustThe most recent release of Statistics Canada’s Consumer Price Index shows an increase in the overall rate of inflation for the month of August. The inflation rate for that month stood at 1.4%, a...

Small decline in unemployment rate for AugustThe most recent release of Statistics Canada’s Labour Force Survey shows a small decline in the overall unemployment rate for the month of August. That rate declined by 0.1%, to 6.2%, which is t...

Bank of Canada announces interest rate increaseIn its regularly scheduled interest rate announcement made on September 6, the Bank of Canada announced that it was increasing its target for the overnight rate, and that the Bank Rate now stands at 1...

Increased inflation rate for JulyThe most recent release of Statistics Canada’s Consumer Price Index indicates that the overall inflation rate for the month of July stood at 1.2%, as measured on a year-over-year basis. The comp...

First tax instalment reminders issued this monthDuring the month of August, the Canada Revenue Agency (CRA) will be issuing 2017 Tax Instalment Reminders, and many taxpayers will be receiving such Reminders for the first time.
Individuals who need...

Unemployment rate down slightly in July The most recent release of Statistics Canada’s Labour Force Survey shows a small decline of 0.2% in the overall unemployment rate for the month of July. That rate stood at 6.3% which was, as not...

Interest rate announcement dates for 2018The Bank of Canada makes eight regularly scheduled interest rate announcements each year, and the Bank recently announced the dates on which those announcements will be made during 2018. Those dates a...

Inflation rate down slightly in JuneThe most recent release of Statistics Canada’s Consumer Price Index shows that the overall rate of inflation for the month of June was 1%, while the rate posted for May stood at 1.3%. Both rates...

Unemployment rate down slightly in JuneThe most recent release of Statistics Canada’s Labour Force Survey shows a slight decline in the overall unemployment rate for the month of June. That rate stood at 6.5%, down by 0.1% from the p...

Bank of Canada increases benchmark interest rateAs expected, in its regularly scheduled interest rate announcement made on July 12, the Bank of Canada increased the bank rate from 0.75% to 1.0%.
In the announcement of the rate increase, which can ...

Inflation rate down slightly for MayThe most recent release of Statistics Canada’s Consumer Price Index shows that the overall rate of inflation slowed slightly during the month of May. The year-over-year rate for that month stood...

CRA to provide new small business servicesThe Canada Revenue Agency (CRA) has announced that, following its consultation with respect to services provided by the Agency to small businesses, a number of new services will be provided. Those new...

New return adjustment feature added to EFILEThe Canada Revenue Agency has introduced a new feature to its existing EFILE service, which will allow EFILE service providers to submit adjustment requests using certified software. Currently, the ne...

Unemployment rate up slightly in MayThe most recent release of Statistics Canada’s Labour Force Survey shows that, while employment rose by 55,000 during the month of May, the overall unemployment rate increased by 0.1%. That resu...

Upcoming income tax instalment due dateThe second instalment payment of individual income taxes for the 2017 tax year is due on or before Thursday June 15, 2017. Individual taxpayers who pay taxes by instalment will have received an instal...

Inflation rate for April unchangedThe most recent release of Statistics Canada’s Consumer Price Survey shows that there was no change in the overall inflation rate during the month of April 2017. That rate stood at 1.6%, as meas...

Upcoming webinar on employee taxable benefitsThe Canada Revenue Agency (CRA) will be holding a webinar for employers on the subject of employee taxable benefits. The webinar will be held on Wednesday May 24, 2017.
The webinar is free of charge,...

Slight decrease in unemployment rate for April The most recent release of Statistics Canada’s Labour Force Survey shows a slight decrease in the overall unemployment rate for the month of April 2017, which dropped from 6.7% to 6.5%. The 6.5%...

Interest charges on unpaid taxes begin May 2, 2017Taxpayers who have unpaid tax balances for 2016 are subject to interest charges on those unpaid balances as of May 2, 2017.
The current (until June 30, 2017) rate imposed on unpaid tax amounts by the...

Changing source deductions for 2017This year’s federal Budget repealed and replaced several federal tax credits affecting caregivers of infirm and non-infirm family members. Those changes can in many cases affect the tax payable ...

Decrease in inflation rate for March 2017The most recent release of Statistics Canada’s Consumer Price Index shows a drop in the overall inflation rate for the month of March 2017. The rate for that month stood at 1.6%, as measured on ...

Individual tax payment deadline May 1, 2017For all individual Canadian taxpayers, the deadline for payment of tax amounts owed for the 2016 taxation year is midnight on Monday May 1, 2017.
Payments which are not made in full by that deadline ...

Bank of Canada maintains current interest ratesIn its regularly scheduled interest rate announcement made on April 12, 2017, the Bank of Canada indicated that, in its view, no change was needed to current rates. Accordingly, the bank rate remains ...

Unemployment rate up slightly for March 2017The most recent release of Statistics Canada’s Labour Force Survey shows a small increase in the unemployment rate for the month of March 2017. That rate rose by 0.1%, to 6.7%.
Among demographi...

Slight decrease in inflation rate for FebruaryThe most recent release of Statistics Canada’s Consumer Price Index indicates that the inflation rate for the month of February stood at 2%, as measured on a year-over-year basis. The comparable...

Budget 2017 - Taxi and Ride-Sharing ServicesEffective July 1, 2017, Budget 2017 proposes to extend the GST/HST on taxi operators to ride-sharing services. Taxi operators are required to collect and remit GST/HST on their fares with no dollar ex...

Budget 2017 - Billed-Basis AccountingGenerally, taxpayers are required to include the value of their work in progress (“WIP”) in their income whether or not they have actually received payment for performing the work. H...

Budget 2017 - Home Relocation Loans DeductionIf a taxpayer receives a loan by virtue of their employment with an interest rate below a prescribed rate, he or she is deemed to have received a taxable benefit. However, taxpayers can claim an offse...

Budget 2017 - Medical Expense Tax CreditBudget 2017 proposes to expand the medical tax credit to include costs paid for the purpose of conceiving a child regardless of whether the medical procedures involved are not medically indicated due ...

Budget 2017 - Public Transit Tax CreditBudget 2017 announced that the public transit tax credit will be repealed as of July 1, 2017. The non-refundable credit provided a 15% tax reduction with respect to eligible public transit passes such...

Budget 2017 - Disability Tax CreditBudget 2017 proposes to amend the eligibility criteria for the disability tax credit. One of the conditions required for the credit is that a medical practitioner certifies on CRA Form T2201 that the ...

CRA and Service Canada online services now linkedThe Canada Revenue Agency (CRA) has announced that a link is now available between its website and that of Service Canada, for users of online services at both sites.
Canadian taxpayers can carry out...

Update on CRA online service interruptionThe Canada Revenue Agency (CRA) has issued a notice indicating that its online services have been restored, and that taxpayers are once again able to file their 2016 tax returns online, make payments,...

Mineral exploration tax credit extended to 2018Individual investors in flow-through shares can claim a 15% federal Mineral Exploration Tax Credit. That federal tax credit was scheduled to expire as of March 31, 2017, but Finance Canada has announc...

2017-18 federal Budget date announcedThe Minister of Finance has announced that the 2017-18 federal Budget will be brought down on Wednesday, March 22, 2017. The announcement of the Budget date can be found on the Finance Canada website ...

CRA provides new T1 Adjustment serviceThe Canada Revenue Agency (CRA) has announced that, effective as of February 20, 2017, EFILE service providers will be able to submit T1 adjustments for clients online, using their EFILE software.
Th...

NETFILE service for 2016 returns now availableThe Canada Revenue Agency (CRA) has announced that its online NETFILE service for the filing of individual income tax returns is now available.
NETFILE can be used to file individual tax returns for ...

Obtaining the 2016 income tax return formThe Canada Revenue Agency (CRA) formerly mailed hard copies of the individual income tax return form and guide to Canadian taxpayers, but that service is no longer provided. Taxpayers can, however, ob...

Unemployment rate down slightly in JanuaryThe most recent release of Statistics Canada’s Labour Force Survey indicates that the overall unemployment rate fell slightly during the month of January 2017. That rate fell by 0.1%, from 6.9% ...

CRA issues 2016 Corporation Income Tax Return formThe Canada Revenue Agency (CRA) has released the T2 Corporation Income Tax Return Form to be used by corporations for the 2016 tax year.
The federal T2 is used by all federal, provincial, and territo...

Individual income tax rates and brackets for 2017The Canada Revenue Agency has indicated that an indexing factor of 1.4% will apply to federal individual income tax brackets for the 2017 tax year. The personal income tax brackets and rates which wil...

Inflation up by 1.5% for December 2016The most recent release of Statistics Canada’s Consumer Price Index (CPI) indicates that the rate of inflation for December 2016 stood at 1.5%, as measured on a year-over-year basis.
Inflationa...

Bank of Canada leaves interest rates unchangedIn its scheduled interest rate decision made on January 16, the Bank of Canada (BOC) announced that, in its view, no change was needed to current rates. Accordingly, the bank rate remains at 0.75%.
&...

Unemployment rate up slightly in DecemberThe most recent release of Statistics Canada’s Labour Force Survey indicates that employment rose by 54,000 jobs during the month of December 2016, as the result of gains in full-time work.
Des...

CRA launches GST/HST compliance letter campaignThe Canada Revenue Agency (CRA) has announced that it will be conducting a GST/HST compliance letter campaign pilot project over the next 9 months.
As part of that project, the Agency will send 250 l...

Bank of Canada leaves interest rates unchangedAs expected, the Bank of Canada made no change to current interest rates in its announcement made on December 7. Consequently, the bank rate remains at 0.75%.
In its announcement, which can be found ...

Unemployment rate down slightly in NovemberThe most recent release of Statistics Canada’s Labour Force Survey shows that the overall unemployment rate declined slightly during November, dropping from 7% to 6.8%.
During November, employm...

CRA webinar on payroll deductions for businessesThe Canada Revenue Agency (CRA) regularly holds webinars for businesses on how to fulfill their payroll reporting and remittance obligations.
The last in the current series of such webinars, which wi...

Small increase in inflation rate for OctoberThe most recent release of Statistics Canada’s Consumer Price Index shows that the rate of inflation stood at 1.5% for the month of October, as measured on a year-over-year basis. The year-over-...

Payroll deductions formulas for 2017 releasedThe Canada Revenue Agency (CRA) has issued the 2017 version of its publication T4127, which outlines and summarizes the payroll deductions formulas for computer programs which will be used beginning J...

Changes made to business tax assessment noticesAs of October 2016, changes were made to standard correspondence sent to business owners by the Canada Revenue Agency (CRA). Specifically, the CRA will be providing businesses with two new, simplified...

Employment Insurance premium rates for 2017The federal government has announced the Employment Insurance premium rates which will apply for the 2017 calendar year.
Total insurable earnings for the year have been set at $51,300. Employee premi...

No change in unemployment rate in OctoberThe most recent release of Statistics Canada’s Labour Force Survey shows that, while employment during the month of October increased by 44,000 jobs, the unemployment rate was unchanged at 7%.
...

Revised deficit figure for 2016-17 announcedIn his Fall Economic Statement, the Minister of Finance announced that the federal government will post a deficit of $25.1 billion for the 2016-17 fiscal year.
The full Fall Economic Statement can be...

Bank of Canada leaves interest rates unchangedIn its most recent announcement, the Bank of Canada indicated that in its view, no change was required to current interest rates. Accordingly, the bank rate remains at 0.75%.
In the press release ann...

Inflation rate of 1.3% recorded for SeptemberThe most recent release of Statistics Canada’s Consumer Price Index shows an inflation rate of 1.3% for the month of September, as measured on a year-over-year basis.
Prices for the month were ...

Date announced for Fall Economic and Fiscal UpdateThe federal Minister of Finance has announced that the 2016 Fall Economic and Fiscal Update will be released on Tuesday November 1, 2016.
The Fiscal Update papers will be posted on the Finance Canada...

Prescribed interest rates for 2016The Canada Revenue Agency (CRA) has announced the interest rates that will apply to amounts owed to and by the federal government for 2016, as well as the rates that will apply for the ...

Finance posts first quarter fiscal resultsThe Department of Finance has issued the August release of The Fiscal Monitor, which outlines the revenue and expense figures for the federal government for the first quarter of fiscal 2016-17.
Durin...

Applying for the Canada Child BenefitAs of July 2016, the former Universal Child Care Benefit (UCCB) and the Child Tax Benefit (CTB) were replaced by the new Canada Child Benefit (CCB), a non-taxable, means-tested benefit paid to Canadia...

Employment insurance premium rates for 2016Effective January 1, 2016, maximum insurable earnings for purposes of the Employment Insurance program will increase from $49,500 to $50,800. This means that an insured worker will pay EI premiums in ...

Planning for – or even thinking about – 2018 taxes when it’s not even mid-December 2017 may seem more than a little premature. However, most Canadians will start paying their taxes for 2018 with the first paycheque they receive in January, and it’s worth taking a bit of time to make sure that things start off – and stay – on the right foot.

Planning for – or even thinking about – 2018 taxes when it’s not even mid-December 2017 may seem more than a little premature. However, most Canadians will start paying their taxes for 2018 with the first paycheque they receive in January, and it’s worth taking a bit of time to make sure that things start off – and stay – on the right foot.

For most Canadians, (certainly for the vast majority who earn their income from employment), income tax, along with other statutory deductions like Canada Pension Plan contributions and Employment Insurance premiums, are paid periodically throughout the year by means of deductions taken from each paycheque received, with those deductions then remitted to the Canada Revenue Agency (CRA) on the taxpayer’s behalf by his or her employer.

Of course, each taxpayer’s situation is unique and so the employer has to have some guidance as to how much to deduct and remit on behalf of each employee. That guidance is provided by the employee/taxpayer in the form of TD1 forms which are completed and signed by each employee, sometimes at the start of each year, but certainly at the time employment commences. Each employee must, in fact, complete two TD1 forms – one for federal tax purposes and the other for provincial tax imposed by the province in which the taxpayer lives. Federal and provincial TD1 forms for 2018 (which were recently posted on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms.html) list the most common statutory credits claimed by taxpayers, including the basic personal credit, the spousal credit amount, and the age amount. Adding amounts claimed on each form gives the Total Claim Amounts (one federal, one provincial) which the employer then uses to determine, based on tables issued by the CRA, the amount of income tax which should be deducted (or withheld) from each of the employee’s paycheques and remitted on his or her behalf to the federal government.

While the TD1 completed by the employee at the time his or her employment commenced will have accurately reflected the credits claimable by the employee at that time, everyone’s life circumstances change. Where a baby is born, or a son or daughter starts post-secondary education, a taxpayer turns 65 years of age, or an elderly parent comes to live with his or her children, the affected taxpayer will be become eligible to claim tax credits not previously available. And, since the employer can only calculate source deductions based on information provided to it by the employee, those new credit claims won’t be reflected in the amounts deducted at source from the employee’s paycheque.

Consequently, it’s a good idea for all employees to review the TD1 form prior to the start of each taxation year and to make any changes needed to ensure that a claim is made for any and all credit amounts currently available to him or her. Doing so will ensure that the correct amount of tax is deducted at source throughout the year.

Where the taxpayer has available deductions which cannot be recorded on the TD1, like RRSP contributions, deductible support payments or child care expenses, it makes things a little more complicated, but it’s still possible to have source deductions adjusted to accurately reflect the employee’s tax liability for 2018. The way to do so is to file Form T1213, Request to Reduce Tax Deductions at Source (available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t1213.html) with the CRA. Once that form is filed with the CRA, the Agency will, after verifying that the claims made are accurate, provide the employer with a Letter of Authority authorizing that employer to reduce the amount of tax being withheld at source.

Of course, as with all things bureaucratic, having one’s source deductions reduced by filing a T1213 takes time. Consequently, the sooner a T1213 for 2018 is filed with the CRA, the sooner source deductions can be adjusted, effective for all paycheques subsequently issued in that year. Providing an employer with an updated TD1 for 2018 at the same time will ensure that source deductions made during 2018 will accurately reflect all of the employee’s current circumstances, and consequently his or her actual tax liability for the year.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

For most Canadians, registered retirement savings plans (RRSPs) don’t become top of mind until near the end of February, as the annual contribution deadline approaches. When it comes to tax-free savings accounts (TFSAs), most Canadians are aware that there is no contribution deadline for such plans, so that contributions can be made at any time. Consequently, neither RRSPs nor TFSAs tend to be a priority when it comes to year-end tax planning.

For most Canadians, registered retirement savings plans (RRSPs) don’t become top of mind until near the end of February, as the annual contribution deadline approaches. When it comes to tax-free savings accounts (TFSAs), most Canadians are aware that there is no contribution deadline for such plans, so that contributions can be made at any time. Consequently, neither RRSPs nor TFSAs tend to be a priority when it comes to year-end tax planning.

Notwithstanding those facts, there are considerations which apply to both RRSPs and TFSAs in relation to the approach of the end of calendar year. Failing to take those considerations into account can mean the permanent loss of contribution room, a loss of flexibility when it comes to making withdrawals, or having to pay more tax than required when funds are withdrawn. Some of those considerations are outlined below.

When you need to make your RRSP contribution on or before December 31st

While most RRSP contributions, in order to be deducted on the return for 2017, can be made anytime up to and including March 1, 2018, there is one important exception to that rule.

Every Canadian who has an RRSP must collapse that plan by the end of the year in which he or she turns 71 years of age – usually by converting the RRSP into a registered retirement income fund (RRIF) or by purchasing an annuity. An individual who turns 71 during the year is still entitled to make a final RRSP contribution for that year, assuming that he or she has sufficient contribution room. However, in such cases, the 60-day window for contributions after December 31st is not available. Any RRSP contribution to be made by a person who turns 71 during the year must be made by December 31st of that year.

Make spousal RRSP contributions before December 31

Under Canadian tax rules, a taxpayer can make a contribution to a registered retirement savings plans (RRSP) in his or her spouse’s name and claim the deduction for the contribution on his or her own return. When the funds are withdrawn by the spouse, the amounts are taxed as the spouse’s income, at a (presumably) lower tax rate. However, the benefit of having withdrawals taxed in the hands of the spouse is available only where the withdrawal takes place no sooner than the end of the second calendar year following the year in which the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December of 2017, the contributor can claim a deduction for that contribution on his or her return for 2017. The spouse can then withdraw that amount as early as January 1, 2020 and have it taxed in his or her own hands. If the contribution isn’t made until January or February of 2018, the contributor can still claim a deduction for it on the 2017 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 1, 2021. It’s an especially important consideration for couples who are approaching retirement who may plan on withdrawing funds in the relatively new future. Even where that’s not the situation, making the contribution before the end of the calendar year will ensure maximum flexibility should an unanticipated withdrawal become necessary.

Accelerate any planned TFSA withdrawals into 2017

Each Canadian aged 18 and over can make an annual contribution to a Tax-Free Savings Account (TFSA) – the maximum contribution for 2017 is $5,500. As well, where an amount previously contributed to a TFSA is withdrawn from the plan, that withdrawn amount can be re-contributed, but not until the year following the year of withdrawal.

Consequently, it makes sense, where a TFSA withdrawal is planned within the next few months, perhaps to pay for a winter vacation or to make an RRSP contribution, to make that withdrawal before the end of the calendar year. A taxpayer who withdraws funds from his or her TFSA before December 31st, 2017 will have the amount withdrawn added to his or her TFSA contribution limit for 2018, which means it can be re-contributed as early as January 1, 2018. If the same taxpayer waits until January of 2018 to make the withdrawal, he or she won’t be eligible to replace the funds withdrawn until 2019.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

As the 2017 calendar year winds down, the window of opportunity to take steps to reduce one’s tax bill for the 2017 tax year is closing. As a general rule, tax planning or tax saving strategies must be undertaken and completed by December 31st, in order to make a difference to one’s tax liability for 2017. (For individual taxpayers, the only significant exception to that rule is registered retirement savings plan contributions. Such contributions can be made any time up to and including March 1, 2018, and claimed on the return for 2017.)

As the 2017 calendar year winds down, the window of opportunity to take steps to reduce one’s tax bill for the 2017 tax year is closing. As a general rule, tax planning or tax saving strategies must be undertaken and completed by December 31st, in order to make a difference to one’s tax liability for 2017. (For individual taxpayers, the only significant exception to that rule is registered retirement savings plan contributions. Such contributions can be made any time up to and including March 1, 2018, and claimed on the return for 2017.)

While the remaining time frame in which tax planning strategies for 2017 can be implemented is only a few weeks, the good news is that the most readily available of those strategies don’t involve a lot of planning or complicated financial structures – in many cases, it’s just a question of considering the timing of expenditures which would have been made in any case. Below is a list of the most common such opportunities available to individual Canadians.

Charitable donations

The federal government and all of the provincial and territorial governments provide a tax credit for donations made to registered charities during the year. In all cases, in order to claim a credit for a donation in a particular tax year, that donation must be made by the end of that calendar year – there are no exceptions.

There is, however, another reason to ensure donations are made by December 31st. The credit provided by each of the federal, provincial, and territorial governments is a two-level credit, in which the percentage credit claimable increases with the amount of donation made. For federal tax purposes, the first $200 in donations is eligible for a non-refundable tax credit equal to 15% of the donation. The credit for donations made during the year which exceed the $200 threshold is, however, calculated as 29% of the excess. Where the taxpayer making the donation has taxable income (for 2017) over $202,800, charitable donations above the $200 threshold can receive a federal tax credit of 33%.

As a result of the two-level credit structure, the best tax result is obtained when donations made during a single calendar year are maximized. For instance, a qualifying charitable donation of $400 made in December 2017 will receive a federal credit of $88 ($200 × 15% + $200 × 29%). If the same amount is donated, but the donation is split equally between December 2017 and January 2018, the total credit claimable is only $60 ($200 × 15% + $200 × 15%), and the 2018 donation can’t be claimed until the 2018 return is filed in April 2019. And, of course, the larger the donation in any one calendar year, the greater the proportion of that donation which will receive credit at the 29% level rather than the 15% level.

It’s also possible to carry forward, for up to 5 years, donations which were made in a particular tax year. So, if donations made in 2017 don’t reach the $200 level, it’s usually worth holding off on claiming the donation and carrying forward to the next year in which total donations, including carryforwards, are over that threshold. Of course, this also means that donations made but not claimed in any of the 2012, 2013, 2014, 2015, or 2016 tax years can be carried forward and added to the total donations made in 2017, and the aggregate then claimed on the 2017 tax return.

When claiming charitable donations, it’s possible to combine donations made by oneself and one’s spouse and claim them on a single return. Generally, and especially in provinces and territories which impose a high-income surtax – currently, Ontario and Prince Edward Island – it makes sense for the higher income spouse to make the claim for the total of charitable donations made by both spouses. Doing so will reduce the tax payable by that spouse and thereby minimize (or avoid) liability for the provincial high-income surtax.

This year, there is an additional last-chance incentive for Canadians who have not been in the habit of making charitable donations to make a cash donation to a registered charity. In the 2013 Budget, the federal government introduced a temporary charitable donations super-credit. That super-credit (which can be claimed only once) allows individuals who have not claimed a charitable donations tax credit in any tax year since 2007 to claim a super-credit on up to $1,000 in cash donations made during the year. The super-credit works by providing an additional 25% credit for cash donations. Consequently, when the super-credit is combined with the regular charitable donations tax credit, the total credit claimable is equal to 40% (15% + 25%) of donations under $200 and 54% (29% + 25%) of donations over the $200 threshold. This year (2017) is the last year for which the super-credit can be claimed, and only in respect of qualifying donations made before the end of the year.

Timing of medical expenses

There are an increasing number of medical expenses which are not covered by provincial health care plans, and an increasing number of Canadians who do not have private coverage for such costs through their employer. In those situations, Canadians have to pay for such unavoidable expenditures – including dental care, prescription drugs, ambulance trips, and many other para-medical services, like physiotherapy, on an out-of-pocket basis. Fortunately, where such costs must be paid for partially or entirely by the taxpayer, the medical expense tax credit is available to help offset those costs. Unfortunately, the computation of such expenses and, in particular, the timing of making a claim for the credit, can be confusing. In addition, the determination of which expenses qualify for the credit and which expenses do not isn’t necessarily intuitive, nor is the determination of when it’s necessary to obtain prior authorization from a medical professional in order to ensure that the contemplated expenditure will qualify for the credit.

The basic rule is that qualifying medical expenses (a lengthy list of which can be found on the Canada Revenue Agency (CRA) website at http://www.cra-arc.gc.ca/medical/#mdcl_xpns) over 3% of the taxpayer’s net income, or $2,268, whichever is less, can be claimed for purposes of the medical expense tax credit on the taxpayer’s return for 2017.

Put in more practical terms, the rule for 2017 is that any taxpayer whose net income is less than $75,500 will be entitled to claim medical expenses that are greater than 3% of his or her net income for the year. Those having income over $75,500 will be limited to claiming qualifying expenses which exceed the $2,268 threshold.

The other aspect of the medical expense tax credit which can cause some confusion is that it’s possible to claim medical expenses which were incurred prior to the current tax year, but weren’t claimed on the return for the year that the expenditure was made. The actual rule is that the taxpayer can claim qualifying medical expenses incurred during any 12-month period which ends in the current tax year, meaning that each taxpayer must determine which 12-month period ending in 2017 will produce the greatest amount eligible for the credit. That determination will obviously depend on when medical expenses were incurred so there is, unfortunately, no universal rule of thumb which can be used.

Medical expenses incurred by family members – the taxpayer, his or her spouse, dependent children who were born in 2000 or later, and certain other dependent relatives – can be added together and claimed by one member of the family. In most cases, it’s best, in order to maximize the amount claimable, to make that claim on the tax return of the lower income spouse, where that spouse has tax payable for the year.

As December 31st approaches, it’s a good idea to add up the medical expenses which have been incurred during 2017, as well as those paid during 2016 and not claimed on the 2016 return. Once those totals are known, it will be easier to determine whether to make a claim for 2017 or to wait and claim 2017 expenses on the return for 2018. And, if the decision is to make a claim for 2017, knowing what medical expenses were paid and when, will enable the taxpayer to determine the optimal 12-month waiting period for the claim.

Finally, it’s a good idea to look into the timing of medical expenses which will have to be paid early in 2018. Where those are significant expenses (for instance, a particularly costly medication which must be taken on an ongoing basis) it may make sense, where possible, to accelerate the payment of those expenses to December 2017, where that means they can be included in 2017 totals and claimed on the 2017 return.

Reviewing tax instalments for 2017

Millions of Canadian taxpayers (particularly the self-employed and retired Canadians) pay income taxes by quarterly instalments, with the amount of those instalments representing an estimate of the taxpayer’s total liability for the year.

The final quarterly instalment for this year will be due on Friday December 15, 2017. By that time, almost everyone will have a reasonably good idea of what his or her income and deductions will be for 2017 and so will be in a position to estimate what the final tax bill for the year will be, taking into account any tax planning strategies already put in place, as well as any RRSP contributions which will be made before March 2, 2018. While the tax return forms to be used for the 2017 year haven’t yet been released by the CRA, it’s possible to arrive at an estimate by using the 2016 form. Increases in tax credit amounts and tax brackets from 2016 to 2017 will mean that using the 2016 form will likely result in a slight over-estimate of tax liability for 2017.

Once one’s tax bill for 2017 has been calculated, that figure should be compared to the total of tax instalments already made during 2017 (that figure can be obtained by calling the CRA’s Individual Income Tax Enquiries line at 1-800-959-8281). Depending on the result, it may then be possible to reduce the amount of the tax instalment to be paid on December 15 – and thereby free up some funds for the inevitable holiday spending!

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

When it comes to questions around personal finance, two issues tend to dominate current discussions. The first is whether and to what extent Canadians are financially prepared for retirement, and the second is the state of the Canadian real estate market, and whether real estate values are headed up or down in 2018. For many retired Canadians, those two issues are very much interlinked.

When it comes to questions around personal finance, two issues tend to dominate current discussions. The first is whether and to what extent Canadians are financially prepared for retirement, and the second is the state of the Canadian real estate market, and whether real estate values are headed up or down in 2018. For many retired Canadians, those two issues are very much interlinked.

Most Canadians are eligible to receive Canada Pension Plan and Old Age Security payments in retirement. While those two programs provide the “backbone” of retirement income in Canada, they are almost never enough on their own to provide for a comfortable standard of living in retirement. A generation ago, retirees could often count on income from an employer-sponsored pension plan, but now only a minority of retirees and those approaching retirement have that option. Private retirement savings, usually through registered retirement savings plans (RRSPs) are the third “leg” of Canada’s retirement income system, but once again, the amount saved by many Canadians through RRSPs falls short of what will be needed, especially where a retirement can last for twenty or more years, and when inflation over that time period is taken into account. The reality for many Canadians who are retired or approaching retirement is that their single most valuable asset is their home – or more specifically, the equity which they have built up in that home.

In many cases, those approaching retirement opt to sell their current home – sometimes in order to move to a smaller, easier to maintain dwelling and sometimes simply to free up the capital represented by their built-up equity. However, while selling and downsizing is the option chosen by many retirees, not everyone wants to leave the family home at retirement. There are many situations in which moving and downsizing isn’t desirable or even possible. Especially for those living in smaller centres, where the types of available housing may be limited, downsizing or choosing to rent could mean having to move to another community. Moving and leaving behind friends and other social supports is difficult at any age, and especially difficult when it coincides with a major life change like retirement. As well, it’s increasingly the case that adult children “boomerang” back to the family home after finishing their education. In many cases, such adult children are unable to find long-term employment or remuneration from available employment isn’t sufficient, or sufficiently secure, for them to take on the financial obligations of their own home, even as a tenant. For a variety of reasons, then, it may be that retirees need to stay, or choose to stay, in the current family home. Where that is their choice, and the only factor creating pressure for them to sell that home is the need to free up equity to create or increase cash flow during retirement, there are other options available.

One of those options which is currently receiving a lot of attention is the reverse mortgage. Reverse mortgages are better known, more widely used and have a much longer history in the U.S. than they do in Canada. However, such financial vehicles are now being advertised and promoted on a regular basis in the Canadian media, and it’s likely that by now most Canadians have at least heard of them.

Simply put, taking out a reverse mortgage allows individuals to obtain a sum of money based on the value of their home and the equity which they have accumulated in that home. It’s also possible, using a reverse mortgage, to structure the receipt of funds in different ways. The homeowner can choose to receive a lump sum amount, or can opt to receive a series of payments which will provide a regular income stream, or some combination of the two. And, with a reverse mortgage, no repayment of the funds advanced is required until the homeowner leaves or sells the home.

When described in those terms, a reverse mortgage can sound like the perfect solution to a cash-strapped retiree. The ability to ease cash flow worries while remaining in one’s own home with no requirement to make any payments at all can sound like the best of all possible worlds. And it’s certainly true that taking out a reverse mortgage can make sense for retirees who are house rich but cash or cash-flow poor. But, as with all financial tools, it’s necessary to understand both the benefits and the potential costs and risks of getting a reverse mortgage.

The potential downside of a reverse mortgage starts with the basic costs of obtaining one. Setting up a reverse mortgage involves a number of costs for the homeowner, including the need to have one’s property appraised. There will also be closing costs, and the homeowner will be required to obtain independent legal advice, and to pay the cost of obtaining such advice.

Once the reverse mortgage is taken out, interest will, of course, be levied on all amounts provided, and will accumulate from the time the funds are first advanced. Total interest costs can add up very quickly and reach significant amounts by the time the debt is eventually to be repaid, usually out of the proceeds from the sale of the house. And, of course, every dollar of funds advanced and interest levied eats away at the amount of equity which the homeowner has built up, on a dollar-for-dollar basis.

In order to obtain a reverse mortgage, the homeowner must be at least 55 years of age, and the amount which can be obtained through any reverse mortgage is limited to 55% of the current value of the home. And, where there is already a mortgage or other form of loan secured by the home (as is increasingly the case for retirees), the reverse mortgage lender will require that any such indebtedness first be paid off with the funds received from the reverse mortgage.

The major benefit of a reverse mortgage for many retirees is that they are not required to make payments while living in the home, putting much less of a strain on cash flow. Offsetting that benefit, however, is the fact that the interest rate charged on a reverse mortgage is usually higher than that which would be levied under a traditional mortgage or other similar financial products. As well, under the terms of many such arrangements, a prepayment penalty is levied where the homeowner moves or sells the house within three years of obtaining the reverse mortgage.

Many retirees who obtain a reverse mortgage do so with the thought that the debt will not need to be repaid until after their death, when the house will be sold. However, it’s necessary to consider the possibility that the homeowner/retiree will need to move from his or her home at some point in the future to an assisted living facility. Care in such facilities does not come cheap, and in many cases the retiree must shoulder all or a part of the cost of such care on an out-of-pocket basis. If the retiree is counting on his or her home equity to pay for such care, it is necessary to consider the extent to which the reverse mortgage will reduce that accumulated home equity and, consequently, the funds available to pay for needed care.

For those who are considering whether a reverse mortgage is the right solution for them in retirement, the Financial Consumer Agency of Canada (FCAC) suggests getting answers from prospective lenders to the following questions:

What are all the fees?

Are there any penalties if you sell your home within a certain period of time?

If you move or die, how much time will you or your estate have to pay off the loan’s balance?

When you die, what happens if it takes your estate longer than the stated time period to fully repay the loan?

What happens if the amount of the loan ends up being higher than your home’s value when it is time to pay the loan back?

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

Just about any financial or investment transaction can now be carried out online, and many Canadians conduct most or all of their financial affairs in an online environment, whether through their financial institution’s web-based banking and investment services or by using mobile apps. The shift to managing one’s financial matters online has extended to dealing with income tax matters, and that’s a trend which has been both aided and encouraged by the Canada Revenue Agency (CRA).

Just about any financial or investment transaction can now be carried out online, and many Canadians conduct most or all of their financial affairs in an online environment, whether through their financial institution’s web-based banking and investment services or by using mobile apps. The shift to managing one’s financial matters online has extended to dealing with income tax matters, and that’s a trend which has been both aided and encouraged by the Canada Revenue Agency (CRA).

The CRA’s most notable success in encouraging Canadians into the online tax world has been in relation to the filing of the annual tax return. Motivated, perhaps, by the prospect of quicker processing turnaround and faster receipt of tax refunds, Canadians have taken to online filing of returns in droves. For the latest filing year, 2016, over 24 million individual income tax returns (or 86% of total returns filed) were filed using electronic methods.

Clearly most Canadians have embraced the fact that filing the annual return now requires a keyboard and mouse and not paper and pencil. The ability to file the annual return online is, however, only the tip of the iceberg when it comes to online services, as there is an enormously wide range of CRA services and personal tax information which can be accessed online.

The starting point for all such information and services is the CRA’s website. That website was for many years found at www.cra.gc.ca, but federal government websites were reorganized this year, and the CRA website is now subsumed with the general Government of Canada website, and found at https://www.canada.ca/en/services/taxes.html.

General (i.e., non-taxpayer specific) information is organized on that site within a number of subject categories, including income tax, goods and service tax and harmonized sales tax, savings and pension plans, payroll issues, and child and family benefits. A drop-down menu under each heading provides a listing of topics within each category and each of those in turn addresses specific questions related to that topic.

While a broad range of general tax information is available through the CRA site, dealing with one’s personal tax matters requires that a taxpayer register for the CRA’s My Account service. Using that service, it’s possible to carry just about any tax-related transaction and to obtain personal (i.e., taxpayer specific) information about one’s tax history and current tax status. As might be expected with a tool which provides such broad access to confidential tax information, there are extensive security measures which must be fulfilled in order to obtain such access.

The good news is that taxpayers who are already registered (i.e., have a user ID and password) for online banking services at a number of Canadian financial institutions can use that same ID and password for purposes of the CRA’s My Account. The current list of such Canadian financial institutions (known as “Sign-In Partners”) is as follows:

Affinity Credit Union

BMO Financial Group

CHOICE REWARDS MasterCard

CIBC Canadian Imperial Bank of Commerce

Desjardins Group

National Bank of Canada

RBC Royal Bank

Scotiabank

Tangerine

TD Bank Group

The process is a relatively straightforward one, although a bit time-consuming. Users log-in using the “Sign-in Partner” feature on the My Account website to start the registration process. They will then receive a CRA security code, usually by mail. The next time the individual signs into My Account, he or she will use that security code to complete registration for My Account and will then have full access to the My Account range of services. On subsequent log-ins, only the Sign-in Partner user ID and password will be required.

Enter an amount you entered on one of your income tax and benefit returns. Have a copy of your returns handy. (The line amount requested will vary. It could be from the current tax year or the previous one.) To register, a return for one of these two years must have been filed and assessed.

Create a CRA user ID and password.

Create your security questions and answers. You can also decide if you want a persistent cookie added to your computer, so you can access CRA Login Services using that same computer later without being asked for more identification.

After step one of the registration process is completed, the taxpayer will have access to a limited amount of personal tax information on My Account. That information includes viewing the status (received/in process/assessed) of an already filed tax return, viewing Notices of Assessment or Reassessment, and finding out one’s registered retirement savings plan (RRSP) or tax-free savings account (TFSA) contribution limits.

Once step one of the registration process is done, the CRA will send a security code to the taxpayer. Since the security code is sent by regular mail, a wait time of a few weeks is likely.

Step 2 – Enter the CRA security code

Once the security code is received, the taxpayer can access his or her account by returning to My Account for Individuals, selecting "CRA login," and entering his or her CRA user ID and password. The user will be prompted to enter the CRA security code, after which he or she will have full access to all My Account services. On the next and subsequent log-ins, only the CRA ID and password will be required.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

As the days shorten and temperatures drop into the single digits, the thoughts of many Canadians turn to the idea of spending at least some part of the upcoming Canadian winter somewhere much warmer — most often, in one of the southern US states. And, while the less than robust state of the Canadian dollar relative to US currency has required Canadians to downsize some of those plans, it is still the case that thousands of Canadian “snowbirds” fly south during the worst of the Canadian winter.

As the days shorten and temperatures drop into the single digits, the thoughts of many Canadians turn to the idea of spending at least some part of the upcoming Canadian winter somewhere much warmer — most often, in one of the southern US states. And, while the less than robust state of the Canadian dollar relative to US currency has required Canadians to downsize some of those plans, it is still the case that thousands of Canadian “snowbirds” fly south during the worst of the Canadian winter.

Wherever they are going, and however long they are staying, it’s safe to say that the thoughts of those snowbirds are on enjoying the warm weather and the sunshine, and that the potential financial consequences or income tax issues raised by their trip down south are not top-of-mind.

There is, however, one issue which every single person who travels out of the country — to any jurisdiction, for any length of time — must take care of, and that’s the need to obtain travel medical insurance. There are no circumstances in which it makes sense to leave Canada without such insurance in place: it is, in a word, foolish to leave Canada without ensuring that travel medical insurance in securely in place.

A lucky few (and increasingly fewer) individual Canadians may already have the needed coverage through their employer or, for retirees, their former employers. For those who don’t (or those who do but wish to augment such coverage), the solution is to obtain private travel medical insurance coverage. There is no shortage of companies offering such plans and the terms and conditions of different plans vary greatly. Consequently, it’s not really possible to provide one-size-fits-all advice with respect to obtaining such policies, with three exceptions.

First, it is critical to determine the extent of the coverage provided, particularly when it comes to pre-existing medical conditions. Coverage exclusions in travel medical insurance policies almost always relate to conditions which the applicant already has — and, of course, those are the conditions which are most likely to give rise to the need for out-of-country medical treatment.

Second, it’s important to be very clear on the requirements for information — particularly medical history — which must be disclosed as part of the application, in terms of both detail and time period. It was formerly the case that applicants for travel medical insurance were required to provide details of their medical history for the previous 12 or perhaps 24 months. However, those requirements have changed for some policies or some insurers, and it’s sometimes the case that an applicant is required to provide information ranging across his or her entire lifetime medical history. For any kind of insurance, coverage can be denied where the information provided on the application form is not accurate and complete, and insurers have denied coverage where medical history information was omitted, even if that information wasn’t even known to the applicant. In light of that, and given the potentially ruinous financial consequences of a denial of coverage, it’s not at all a bad idea to have an insurance broker or even a lawyer review one’s application for a travel medical insurance policy to make sure that there will be no unpleasant surprises when and if a claim for coverage is made.

Third, anyone applying for travel medical insurance should be clear on whether the issuer of a particular policy will pay out-of-country medical expenses directly, as they are incurred, or will require the insured to make payment upfront, and seek reimbursement after the fact. While the cost of a trip to an emergency department for a few stitches may be within the financial reach of most snowbirds, the cost of medical care for more serious events — like a heart attack or a stroke — can quickly run into the tens or even hundreds of thousands of dollars. Few individuals have the financial means to cover such costs out-of-pocket, even by using available sources of credit.

For snowbirds who are seeking the sun for only a few weeks, obtaining travel medical insurance is likely the biggest item on their to-do list before leaving. For those who are planning extended stays down south for a few months, or even the whole winter, other considerations can come into play.

On a very practical level, such snowbirds need to think about how they will access funds needed to live out of the country for an extended period. Many snowbirds are eligible to receive monthly payments from both the Canada Pension Plan (CPP) and the Old Age Security (OAS). Fortunately, it’s relatively easy to arrange for payment of both while down south, as payments of both CPP and OAS benefits can be made by direct deposit to an account at a US bank where the Canadian recipient is located. Funds deposited in this way are converted to US dollars prior to deposit, and the exchange rate used by the Canadian government will typically be better than most which can be obtained locally.

The other issue which snowbirds who are planning extended stays down south must consider is that of Canadian residency. Canada, unlike the United States, taxes individuals on the basis of residency, and individuals who spend a significant amount of time out of Canada during the year need to consider the effect that might have on their status as Canadian residents.

Fortunately, most snowbirds, even those who spend the whole winter down south, won’t have a problem since most of them will continue to be what’s called “factual residents of Canada”. There is no single test for whether an individual is a factual resident of Canada — rather, the determination is made based on a number of factors which measure the extent to which an individual has continued to maintain “residential ties” to Canada. The most significant of those factors include keeping a residence (whether owned or rented) in Canada, and having a spouse or dependents here. Where any of those three are the case, that’s usually enough for the Canadian tax authorities to conclude that an individual remains a factual resident of Canada. So, for example, in a typical scenario in which a retired couple spends three or four months each winter in Florida, leaving their Canadian home to be looked after by their children, there’s no question but that the retirees are factual residents of Canada, and their annual stay down south has no effect on their Canadian tax rights and obligations.

The vast majority of snowbirds who winter out of the country do maintain sufficient residential ties to Canada to be considered factual residents. Consequently, when they file their tax returns for the year, they follow all the same rules as year-round Canadian residents, reporting all income received during the year from both inside and outside Canada and claiming all available deductions. And, as an added “perk”, travel medical insurance premiums paid to allow the snowbird to winter down south without worry are deductible from income for Canadian tax purposes.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

The fiscal cycle of the federal government follows a predictable annual path. Each spring, the Minister of Finance brings down a budget outlining the government’s revenues and expenditures and its surplus or deficit projections for the fiscal year which runs from April 1 to March 31. That budget also includes the announcement of any changes to the tax system which the government wishes to implement.

The fiscal cycle of the federal government follows a predictable annual path. Each spring, the Minister of Finance brings down a budget outlining the government’s revenues and expenditures and its surplus or deficit projections for the fiscal year which runs from April 1 to March 31. That budget also includes the announcement of any changes to the tax system which the government wishes to implement.

In the fall, the Minister of Finance announces the Economic and Fiscal Update which, as the name implies, provides an update of the government’s finances approximately halfway through the current fiscal year. Sometimes, as was the case this year, the Update includes announcements of additional tax changes.

The 2017-18 Economic and Fiscal Update brought down by the Minister of Finance on October 24, 2017 included a better than expected deficit picture for upcoming fiscal years. That improved fiscal picture allowed the Minister to announce a number of relieving tax measures. While the measures are few, they will affect a great number of corporations and individuals, whether through lower tax rates or increased taxpayer benefits. Those changes are as follows.

Effective as of January 1, 2018, the small business tax rate will be reduced to 10%. A year later, on January 1, 2019, that rate will be reduced again, to 9%.

Lower and middle income Canadian families are eligible to receive the Canada Child Benefit (CCB) — a non-taxable monthly benefit paid by the federal government. The amount of CCB received depends on the size of the family and the family’s net income. While there has been no change to benefit amounts, the Minister indicated that previously announced plans to provide annual cost-of-living changes to those benefits would be brought forward and implemented effective July 1, 2018. As of that date, the amount of benefits payable and the income thresholds which determine eligibility will both be indexed to inflation.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

The fact that Canadian households are carrying a significant amount of debt — in fact, debt loads which seem to continually set new records — isn’t really news anymore. For several years, both private sector financial advisers and federal government banking and finance officials have warned of the risks being taken by Canadians who took advantage of historically low interest rates by continuing to increase their secured and unsecured debt.

The fact that Canadian households are carrying a significant amount of debt — in fact, debt loads which seem to continually set new records — isn’t really news anymore. For several years, both private sector financial advisers and federal government banking and finance officials have warned of the risks being taken by Canadians who took advantage of historically low interest rates by continuing to increase their secured and unsecured debt.

The risks most commonly cited by those advising a greater degree of borrowing restraint was the impact that an increase in interest rates would have on the ability of those debtors to repay — or even service — the debt which they had accumulated. As well, to the extent that such borrowings were secured by home equity, the risk was that a downturn in the real estate market could put those borrowers at risk, or even in a negative equity position, where the amount still owing on their home-related borrowings was greater than the value of their home.

Both of those circumstances have started to materialize in the last two calendar quarters. The Canada-wide real estate market is not in a downturn. However, the expectation among borrowers that real estate values in major urban markets would simply continue to increase without limit has been tempered, somewhat, by the drop in real estate sales in the Greater Toronto Area since the spring of this year. While real estate prices in that market are still up, as measured on a year-over-year basis, they have declined, overall, from the highs recorded in the winter and early spring of 2017.

The long-anticipated increase in interest rates has finally occurred as well, as on July 12 and again on September 6, 2017, the Bank of Canada raised the bank rate for the first time since September 2010. Predictably, financial institutions responded by increasing their mortgage and other loan interest rates. The Bank’s next interest rate announcement, which is scheduled for October 25 may, or may not, include a further increase.

The end of June, just prior to the Bank’s first interest rate increase, marked the end of second quarter of 2017. And, as is usually the case, a number of government and non-government organizations issued statistics and analysis of the current state of Canadian consumer debt. Given the timing, those figures will create a kind of benchmark against which future statistical summaries will be compared, as they create a “snapshot” of the state of Canadian consumer debt taken just as interest rates began to rise, at the end of the ultra-low interest rate environment which began in 2009, and as the ultra-hot real estate market started to cool down.

And the news is … good and bad. The figure which is mostly often quoted in discussions of consumer debt is the debt to disposable income ratio which is published by Statistics Canada. As of the end of June, that ratio stood at $1.68, meaning that the average Canadian household carried $1.68 in debt for each $1.00 of disposable (after-tax) income.

While it’s easy to see that an increasing debt-to disposable income ratio means that Canadians are taking on more debt, that ratio is still a somewhat abstract concept. What is striking, however, is the growth of that ratio over the past quarter century and, especially, since 2005.

In 1990, that percentage stood at 93%, meaning that the debt load of the average Canadian household was 93% of disposable income. By 2005, the debt-to-disposable ratio had risen to 108%. In other words, it took 15 years for the percentage to increase from 93% (in 1990) to 108% (in 2005). From that point, the debt to disposable income ratio accelerated dramatically, as it rose from 108% in 2005 to 150% just five years later, in 2010. The ratio now stands, as of the second quarter of 2017, at 168%.

The StatsCanada figure captures all forms of debt, secured and unsecured, meaning that it includes mortgages, car loans, installment loans of all kinds, lines of credit, and credit card debt. There are a couple of significant differences between secured and unsecured debt — secured debt, by definition, is secured against an asset, so that in the event the borrower goes into default, the lender can seize the asset in payment of the secured debt. The value of that asset is always, at the time of borrowing, greater than the amount borrowed. Unsecured debt, by contrast, is provided on no more than the borrower’s promise to repay. Not surprisingly then, the debt rate levied on unsecured borrowings is always higher than secured debt borrowings.

For both those reasons, it’s more likely that borrowers, when faced with an interest rate increase which bumps up their cost of borrowing, will get into difficulty with unsecured debt. And, as of the second quarter of 2017, the average unsecured debt (strictly speaking, “non-mortgage debt”, but in most cases, the non-mortgage debt of Canadians is unsecured debt) owed by individual Canadians was for the first time, over $22,000.

That figure — $22,154 average debt load per individual borrower — appeared in a summary issued by TransUnion, one of the two major credit reporting agencies in Canada. The summary also outlines the average balance per borrower by the kind of debt incurred, as follows:

Bank card (credit card) ………… $4,069

Automobile …………………………… $20,447

Line of Credit ………………………… $30,108

Installment Loan …………………… $25,455

And, as recently reported by the Financial Consumer Agency of Canada, recent trends in secured debt patterns may also give rise to concern going forward.

One of the fastest growing consumer credit products in Canada is the home equity line of credit (HELOC). A HELOC is similar to a mortgage, in that the debt is secured against the homeowner’s equity in the property. However, under a HELOC, a lender agrees to provide credit to a borrower, not for a fixed amount, but up to a maximum amount, based on the value of the property. Once the HELOC is in place, the available funds can be used for any purpose, whether that purpose is related to home ownership or not. And, while monthly payments are required, the borrower can usually, if he or she wishes, pay only the interest amount which has accrued since the last payment, without reducing the principal at all.

A report issued by the FCAC in June of this year includes the following statistics related to HELOC borrowing.

The number of households that have a HELOC and a mortgage secured against their home has increased by nearly 40 percent since 2011.

40 percent of consumers do not make regular payments toward their HELOC principal.

25 percent of consumers pay only the interest or make the minimum payment.

Most consumers do not repay their HELOC in full until they sell their home.

If there is good news in the figures summarizing the ever-increasing debt load of Canadians, from all sources, it’s in the fact that borrowers are still managing to keep payment of those debts in good standing. In fact, delinquency rates (meaning debts on which payments are more than 90 days late) are, for the most part, down during the second quarter of this year, as measured on both a quarter-over-quarter and year-over-year basis. Whether that trend will continue or be reversed as the impact of the recent interest rate increases takes hold remains to be seen.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

News about another successful cyberattack, on government or on a private company, in a single country or worldwide, is now almost routine. What such events usually have in common is a desire by the hackers who perpetrate the attacks to profit by it — either by demanding payment from the entity whose systems have been compromised, or by obtaining confidential personal information (especially identifying or financial information) about individuals, which the hackers can then use fraudulently or sell to others who wish to do so.

News about another successful cyberattack, on government or on a private company, in a single country or worldwide, is now almost routine. What such events usually have in common is a desire by the hackers who perpetrate the attacks to profit by it — either by demanding payment from the entity whose systems have been compromised, or by obtaining confidential personal information (especially identifying or financial information) about individuals, which the hackers can then use fraudulently or sell to others who wish to do so.

In September of this year, the credit reporting firm Equifax announced that it had been subject to such a successful cyberattack, and that attack was especially concerning, both because of the nature of the information Equifax holds, and because of the number of Canadians affected.

Most Canadian adults have used credit at one time or another. Whenever an individual obtains and uses credit — whether through a credit card, line of credit, car loan, or otherwise, the financial institution which provided the credit provides information about that credit use to a credit reporting agency like Equifax. The information provided includes the original amount of the debt, the payment history, whether any payments were made late, and the current balance. The file held by the credit reporting agency also includes personal identifying information about the individual, which can include the individual’s social insurance number (SIN). Such information is accumulated throughout the individual’s financial life and is used by credit-granting institutions to assess an individual’s creditworthiness whenever he or she makes an application for credit.

It’s readily apparent that credit rating agencies have a great deal of personal and financial information about individuals and it was that information which was compromised in the cyberattack on Equifax which took place between mid-May and July 2017. Equifax has confirmed that personal and financial information of about 100,000 Canadians had been accessed in the cyberattack. (That number is subject to change and increase, as the investigation continues.) The information accessed included individuals’ names, addresses, credit card numbers, and – most ominously – SINs.

Equifax has committed to contacting, by mail (not e-mail or phone), the 100,000 Canadians whose personal information has been compromised. It will also be providing such individuals with credit monitoring and identity theft protection for a period of 12 months, at no charge. Individuals who are not contacted but have questions can contact Equifax at 1-866-699-5712 or by email at EquifaxCanadaInquiry@equifax.com.

Anyone whose personal and financial information is stolen, whatever the circumstances, has good reason to be concerned. And, given the number of instances in which Canadians routinely provide such personal and financial information, online or otherwise, the chances of being affected by an information security breach continue to increase.

As a practical matter, there is really nothing individual Canadians can do to ensure that companies, institutions and governments which have and hold their personal information are not subject to a cyberattack or other information breach. What Canadians can (and should) do is to restrict the personal and financial information which they provide to others to that which is required by law or absolutely necessary in the particular circumstances. And there are a number of steps which individuals can take to protect the personal identifying and financial information which they do disclose, and so minimize the risks that such information will misused or that they will become victims of identity theft.

Perhaps the most important of those steps is the need to protect one’s SIN. Having someone else’s SIN (especially if the person’s name and date of birth is also known) can give an unauthorized person significant access to additional information about that person, and can even allow them to impersonate that person, especially online, where bona fides can often be established simply by providing requested personal identifying information.

The circumstances in which Canadians are legally required to provide their SIN are relatively few and far between — it must be included on the annual tax return, of course, and must be provided to financial institutions where the individual holds an interest-bearing account, a registered retirement savings plan, a registered education savings plan, or a tax-free savings account. There are not many other instances in which providing one’s SIN is required. Notwithstanding, SINs are sometimes treated as a kind of all-purpose identifier, and individuals are frequently asked for that number in situations where it has no possible relevance – for instance, in an application to rent an apartment or a credit card application. It is both legal and prudent to refuse to provide one’s SIN in situations where there is no legal requirement to disclose that information.

For every form and application, financial or otherwise, which is completed by an individual both online or in hard copy, there are usually fields which are required to be completed and some which are not. There is no reason to provide such optional information which, isn’t actually needed for purposes of the form or application being completed. While the optional requested information may seem innocuous, it’s always preferable to have less rather than more personal identifying information in the public domain.

Online shopping is now ubiquitous and, of course, purchasing anything online requires an individual to provide a method of payment, which is usually a credit card number. The major online shopping sites have security protocols in place, but the reality is that providing one’s credit card number online will always carry a risk. There are, however, ways to minimize that risk. Individuals who shop online on a regular basis might consider obtaining a credit card which is used only for online shopping, and which has a relatively low credit limit. That way, should the credit card number fall into the wrong hands, the amount which can be fraudulently charged to that card will be minimal, and the card itself can be cancelled immediately, once the breach is discovered.

For those who wish to obtain personal information about someone else for fraudulent purposes, all forms of social media are, of course, a gold mine. Everyone has heard of the need to exercise caution with respect to the personal information disclosed on social media. What many don’t recognize is the need to consider the totality of information that is being “shared” on all social media platforms in the aggregate, not just on a single site like Facebook, Twitter, or Instagram, or in a single post on any of those sites. Anyone seeking to collect personal information about an individual for identity theft or other fraudulent purposes will certainly put together information from all available sources. And, while a single piece of information disclosed in passing, or in isolation, may not seem to pose a risk, it doesn’t take much information to create that risk. For instance, no one would post their bank account number on social media. But, someone who posts on Facebook about their frustration with a particular interaction with their (named) financial institution has created an opportunity for someone to approach them (weeks or months later) with fraudulent intent, purporting to be from that financial institution and asking them, for instance, to confirm their bank account number as part of the bank’s regular fraud prevention program. And too often, recipients of such approaches don’t consider that the caller might have obtained information about who they bank with from a months-old social media post. Such fraudulent approaches rely on the fact that most recipients don’t think to verify the authenticity of the call or the caller.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

The end of summer means back to school for students of all ages. For parents of elementary and secondary school students the focus is on obtaining back to school clothes and supplies and starting the process of enrollment in after-school activities for the fall. For those already in (or starting) post-secondary education, choosing courses, finding a place to live and paying the initial bills for tuition and residence are more likely to be on the immediate agenda.

The end of summer means back to school for students of all ages. For parents of elementary and secondary school students the focus is on obtaining back to school clothes and supplies and starting the process of enrollment in after-school activities for the fall. For those already in (or starting) post-secondary education, choosing courses, finding a place to live and paying the initial bills for tuition and residence are more likely to be on the immediate agenda.

What both groups of parents and students have in common this school year, however, is that this is the first full school year which will be affected by previously announced tax changes. And, unfortunately, each of those tax changes, for students at all levels, means higher after-tax costs for education-related expenses.

For students enrolled in the public education system there is, of course, no cost to attend. Most such students are, however, enrolled in one or more after-school activities and for nearly all of those activities, there is an out-of-pocket cost that must be paid. Depending on the activity, those costs can easily amount to several hundred dollars per child over the course of the school year. In recent years, parents were able to offset those out-of-pocket costs by claiming the children’s arts credit or the children’s fitness credit, depending on the kind of activity involved. Both such credits were, however, eliminated as of the 2017 tax year. Consequently, neither credit can now be claimed for any formerly qualifying activity or program. In budgeting for the cost of any contemplated after-school activity, parents must budget on the basis that they will be paying the full cost out-of-pocket, and will not be claiming any offsetting tax credit on their tax return for 2017.

At the post-secondary education level, students (and their parents) have benefitted for many years from an “assist” through our tax system, which provides deductions and credits for some of the many associated costs. Two of those credits are, however, no longer available to be claimed.

The biggest cost of post-secondary education is, of course, tuition, and the tax credit provided for eligible tuition costs continues to be available for the upcoming (and subsequent) academic and taxation years. Any student who incurs more than $100 in tuition costs at an eligible post-secondary institution (which would include most Canadian universities and colleges) can still claim a non-refundable federal tax credit of 15% of such tuition costs. The provinces and territories also provide students with an equivalent provincial or territorial credit, with the rate of such credit differing by jurisdiction. At both the federal and provincial levels, the credit acts to reduce tax otherwise payable. Where a student doesn’t have tax payable for the year, as is often the case, any credits earned can be carried forward and claimed by the student in a future year, or transferred in the current year to a spouse, parent, or grandparent.

For many years post-secondary students have also been able to claim two other federal tax credits — the education tax credit and the textbook tax credit. Both, unfortunately, have been eliminated, and so the only credit which will be claimable for the upcoming academic year by post-secondary students is the non-refundable credit for 15% of tuition costs incurred. Where the education and textbook credits have been earned but not claimed in previous years, however, they are still available to be claimed by the student as carryover credits in 2017 or later years.

The CRA publishes a very useful guide to tax measures which affect students enrolled in post-secondary education. That guide, entitled Students and Income Tax, has been updated to take account of the recent changes, and the most recent version is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tg/p105/README.html.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

Although they aren’t usually thought of in such terms, Canadian charities, as measured by the amount of money they receive and administer, can be big businesses. However, because they collect and disperse that money in order to support and advance causes which create a public benefit, charities are accorded special status under our tax laws. Our tax system effectively subsidizes the activities of charitable organizations by providing a tax deduction or tax credit to companies and individuals that contribute to those organizations and by exempting the charities themselves from the payment of income tax.

Although they aren’t usually thought of in such terms, Canadian charities, as measured by the amount of money they receive and administer, can be big businesses. However, because they collect and disperse that money in order to support and advance causes which create a public benefit, charities are accorded special status under our tax laws. Our tax system effectively subsidizes the activities of charitable organizations by providing a tax deduction or tax credit to companies and individuals that contribute to those organizations and by exempting the charities themselves from the payment of income tax.

In order to receive a designation as a registered charity (and consequently to be able to provide donors with a tax receipt enabling them to claim a credit or deduction), an organization is required by law to have exclusively charitable purposes. While the particular kinds of aims and objectives which may qualify an organization for certification as a registered charity vary widely, one kind of activity which cannot qualify as charitable in nature is purely political activity. An organization established solely for political purposes, or an organization that devotes more than an incidental percentage of its resources to political purposes, or whose political activities are not in furtherance of its charitable purposes, cannot qualify (or continue to qualify) as a registered charity.

Support of a particular political party or candidate is an obvious partisan political purpose, but under Canadian law as it relates to charities, the definition of political purposes is much broader. As determined by Canadian courts, political purposes are also those that seek to retain, oppose, or change the law, policy, or decision of any level of government in Canada or a foreign country. Essentially, the rules seek to ensure that any organization that has been designated as a registered charity does not extend the benefits of having that designation to cover political aims or activities, in more than an incidental way. At the extreme end, the rules seek to prevent organizations whose aims are essentially political from “masquerading” as charitable organizations in order to receive the related status and tax benefits.

The initial, general, rule is that that a charity that devotes no more than 10% of its total resources a year to allowable political activities (meaning political activities that are non-partisan and that are both connected with and subordinate to the charity’s purposes) will be operating within allowed guidelines. Smaller charities are given more leeway, and operate under the following guidelines.

Registered charities with less than $50,000 annual income in the previous year can devote up to 20% of their resources to political activities in the current year.

Registered charities whose annual income in the previous year was between $50,000 and $100,000 can devote up to 15% of their resources to political activities in the current year.

Registered charities whose annual income in the previous year was between $100,000 and $200,000 can devote up to 12% of their resources to political activities in the current year.

Charities which breach these rules can face serious sanctions, up to and including temporary suspension or even revocation of their charitable status.

It’s apparent from even a brief summary that determining when a charity has engaged in political activity which must be reported can be a very subjective exercise, and the consequences of making the wrong call can be significant. The CRA recognizes that fact, and has created a number of online resources to assist charities in making that determination. Those resources, which include webinars, FAQ documents, and self-assessment tools, can all be found on the Charities webpage of the CRA website, at www.cra-arc.gc.ca/chrts-gvng/chrts/cmmnctn/pltcl-ctvts/menu-eng.html.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

Most Canadians approaching retirement know that they will be able to receive retirement income from the Canada Pension Plan and Old Age Security programs. Many, however, are unaware that there is a third federal program — the Guaranteed Income Supplement (GIS) — which provides an additional monthly income amount to eligible individuals who already receive Old Age Security. That lack of knowledge is particularly unfortunate because, while there is no need for an individual to apply in order to receive an Old Age Security benefit, anyone who wishes to receive the GIS must apply to do so. (Automatic enrollment in GIS is something that is planned for future implementation, but is not yet in place.). Finally, while the OAS benefit is a standard amount for most recipients, the rules governing eligibility for GIS, and the amount which a particular individual will receive, are more complex.

Most Canadians approaching retirement know that they will be able to receive retirement income from the Canada Pension Plan and Old Age Security programs. Many, however, are unaware that there is a third federal program — the Guaranteed Income Supplement (GIS) — which provides an additional monthly income amount to eligible individuals who already receive Old Age Security. That lack of knowledge is particularly unfortunate because, while there is no need for an individual to apply in order to receive an Old Age Security benefit, anyone who wishes to receive the GIS must apply to do so. (Automatic enrollment in GIS is something that is planned for future implementation, but is not yet in place.). Finally, while the OAS benefit is a standard amount for most recipients, the rules governing eligibility for GIS, and the amount which a particular individual will receive, are more complex.

The first and most basic rule of GIS eligibility is that GIS is paid only to individuals who are already receiving the Old Age Security benefit. Canadians can begin receiving such OAS benefit at age 65, or can defer receipt of that benefit up until the age of 70. However, regardless of the age at which an individual chooses to begin collecting OAS, he or she cannot receive the GIS until that OAS benefit has started.

There is a perception that GIS benefits are available to only the lowest income seniors. While it is true that eligibility for the GIS is tied to income, the current reality is that in the first quarter of 2017, nearly 2 million Canadians, or nearly one-third of those who collect OAS, also received GIS benefits.

The basic rule is that single (or divorced or widowed) individuals who have less than $17,688 in net income for the previous year are eligible to receive at least partial GIS benefits each month. Once net income exceeds the $17,688 threshold, eligibility for GIS is completely eliminated. That figure is somewhat deceiving, however, as not all income sources are treated the same way when it comes to determining net income for purposes of assessing GIS eligibility. When determining such eligibility, the sources from which income is received is nearly as important as the amount of that income.

Generally, in calculating net income for purposes of determining GIS eligibility, the following income amounts are included:

Canada Pension Plan or Quebec Pension Plan amounts;

amounts received from a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF);

amounts received from a registered pension plan (i.e., an employer-sponsored pension plan); and

investment income (interest, dividends, etc.) from all sources.

The following income amounts are not included in net income for purposes of determining GIS eligibility:

Old Age Security amounts; and

any withdrawals from a tax-free savings account (TFSA).

Finally, many retirees work part-time, whether out of financial need or for social reasons. In calculating net income to determine GIS eligibility, an exemption is provided for the first $3,500 in employment income earned each year — in other words, the first $3,500 in employment income earned is not included in net income for GIS eligibility purposes.

The exclusions and partial exclusions from the net income calculation for GIS purposes can mean that someone who would not seem to be eligible by reason of his or her total income may in fact be able to receive at least partial GIS benefits, as in the following example.

A single individual who is over age 65 receives the following income amounts in 2016:

$7,200 in Canada Pension Plan retirement benefits;

$6,840 in Old Age Security benefits;

$6,000 of income from part-time employment;

$5,000 in TFSA withdrawals; and

$3,000 in RRIF withdrawals.

Total income for the year — $28,040

That total income would seem to put the individual well over the eligibility threshold for receiving even partial GIS. However, for purposes of determining such eligibility, not all of the income amounts adding up to that $28,040 in total income will be included. Specifically, the $6,840 in OAS benefits is excluded, as is the $5,000 amount withdrawn from the individual’s TFSA. As well, the first $3,500 in employment income is excluded in computing net income for this purpose. As a result, more than half of the taxpayer’s income amounts received during 2016 are excluded from the computation of net income, and that computation, for purposes of determining GIS eligibility looks like this:

$7,200 in Canada Pension Plan retirement benefits;

$3,000 in RRIF withdrawals;

$2,500 in employment income (the first $3,500 in such income being exempt)

Net income for GIS eligibility purposes — $12,700

Once the adjustments required to determine GIS eligibility are made, the individual’s income is cut by more than half, and the resulting $12,700 in net income is $5,000 below the $17,688 income cut-off for GIS eligibility of $17,688.

In 2017, an individual who is single, divorced, or widowed and is eligible for a full GIS amount will receive $871.86 per month. That amount is reduced as income increases and is eliminated entirely where the individual’s net income exceeds the $17,688 cut-off.

A similar calculation is required for taxpayers who are married. The net income calculation is the same, but the cut-off amount above which GIS eligibility for both spouses is eliminated, where both spouses are receiving OAS, is $23,376. Where one of the spouses does not receive OAS, the combined income threshold for GIS eligibility is $42,384. More information on the benefit and income cut-off amounts for the current quarter (July to September 2017), as well as links to tables which will show the exact amount of GIS payable at different income levels, can be found on the Canada.ca website at https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/payments.html.

A final note — where individuals receive the Guaranteed Income Supplement, whether the full benefit or partial amounts, all such amounts received are non-taxable.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

The Canada Revenue Agency (CRA) doesn’t publish information or statistics on the number of individual taxpayers who owe it money in the form of back taxes, interest, or penalties. Nonetheless, it’s a safe assumption that some percentage of the 28 million or so Canadians who filed a tax return this past spring either couldn’t pay their 2016 taxes when due or still owe money from past years, or both. Being unable to pay one’s bills on time and as due obviously isn’t desirable, no matter who the creditor is. There are, however, a number of reasons why owing money to the tax authorities is a particularly bad idea.

The Canada Revenue Agency (CRA) doesn’t publish information or statistics on the number of individual taxpayers who owe it money in the form of back taxes, interest, or penalties. Nonetheless, it’s a safe assumption that some percentage of the 28 million or so Canadians who filed a tax return this past spring either couldn’t pay their 2016 taxes when due or still owe money from past years, or both. Being unable to pay one’s bills on time and as due obviously isn’t desirable, no matter who the creditor is. There are, however, a number of reasons why owing money to the tax authorities is a particularly bad idea.

Those reasons start with the interest cost of carrying such debt. Even with the recent increase, interest rates remain near historic lows, but the CRA, by law, charges interest at levels higher than normal commercial rates. The interest rate charged by the CRA on overdue or insufficient tax payments is set quarterly. For the third quarter of 2017, therefore, covering the months of July, August, and September, the interest rate charged on taxes owing is 5%.

While that 5% rate is still lower by far than, for instance, the interest rate charged on many credit card balances, it is the interest calculation method used by the CRA which can really inflate the interest cost of having tax debts. Where an amount is owed to the CRA, interest charged on that amount is compounded daily, meaning that on each successive day, interest is being levied on the interest charged the day before. Not surprisingly, interest costs calculated in that way can add up quickly.

The CRA also has a very broad range of options at its disposal to compel payment, and a very long period of time in which to use them. Where a taxpayer hasn’t paid an amount owed within 30 days after he or she receives a Notice of Assessment stating the amount owed, the CRA will usually contact the taxpayer, by phone or by mail, with a request for payment. If the taxpayer does not contact the CRA to make a payment or set up a payment arrangement within 90 days after the date the Notice of Assessment was mailed, the CRA will likely resort to its other collection options.

The CRA has the right, where there are any amounts owed to the taxpayer by any other department of the federal government (for example, a goods and services tax credit amount) to, in effect, seize those amounts and apply them to the tax debt. The CRA also has the authority to intercept (or garnish) money which may be owing to the taxpayer from a third party, like an employer and, as a last resort, can direct that the taxpayer’s assets be seized and sold to satisfy the tax debt.

Of course, the CRA’s goal, like that of any other creditor, is to get the debt paid without having to resort to expensive and time-consuming administrative or legal processes. It’s relatively rare for a tax debt to reach the stage of litigation or garnishment, as it is in everyone’s interest to resolve matters before things reach that point. And, perhaps contrary to popular belief, the CRA has some flexibility. When the amount of taxes due on filing can’t be paid, or can’t be paid in full, it’s in the taxpayer’s best interests to contact the CRA and let them know of that fact.

Not surprisingly, the CRA tries to make it easy for taxpayers to contact it to make such arrangements. Taxpayers can use the CRA’s automated TeleArrangement service at 1-866-256-1147, for which it is necessary to provide one’s social insurance number and date of birth, and the amount which appeared on line 150 from the last return for which a notice of assessment was received. TeleArrangement is available Monday to Friday, from 7 a.m. to 10 p.m., Eastern time. For those who wish to speak to an actual representative of the CRA, a toll-free telephone line (1-888-863-8657) is staffed by agents from Monday to Friday, except on statutory holidays. The taxpayer can propose a payment schedule based on his or her ability to pay, and the CRA, if it is satisfied that the inability to pay is genuine, will generally be amenable to entering into some type of payment arrangement. Entering into such a payment arrangement does not, of course, stop the interest clock from running, as interest will continue to be assessed at the current rate, and compounded daily.

The alternative to making a payment arrangement and becoming subject to the CRA’s punitive interest assessment practices is sometimes to borrow the required funds from a third party and pay the CRA in full as soon as possible. Especially where the taxpayer can provide some security — like the equity in a home — it may be possible to borrow funds at less than the 5% interest rate currently being charged by the CRA on overdue tax amounts.

One final blow: interest paid on tax debts, whether paid to the CRA or to a third party lender, is not deductible from income.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

Sometime around the middle of August, millions of Canadians will receive unexpected mail from the Canada Revenue Agency (CRA), and that mail will contain unfamiliar and unwelcome news. Specifically, the enclosed form will advise the recipient that, in the view of the CRA, he or she should make instalment payments of income tax on September 15 and December 15th of this year – and will helpfully identify the amounts which should be paid on each date.

Sometime around the middle of August, millions of Canadians will receive unexpected mail from the Canada Revenue Agency (CRA), and that mail will contain unfamiliar and unwelcome news. Specifically, the enclosed form will advise the recipient that, in the view of the CRA, he or she should make instalment payments of income tax on September 15 and December 15th of this year – and will helpfully identify the amounts which should be paid on each date.

No one particularly likes receiving unexpected mail from the tax authorities, and correspondence which suggests that the recipient should be making payments of tax to the CRA during the year (instead of when he or she files the return for the year next April) is likely to be both perplexing and somewhat alarming. It’s fair to say that most Canadians aren’t familiar with the payment of income tax by instalments, and are therefore at a loss to know how to proceed the first time they receive an Instalment Reminder.

The reason the instalment payment system is unfamiliar to most Canadians is that most of us pay income taxes during our working lives through a different system. Every Canadian employee has tax automatically deducted from his or her paycheque (“at source”), before that paycheque is issued, and that tax is remitted, by the employer to the CRA, on the employee’s behalf. Such deductions and remittances accrue to the employee’s behalf, and they are credited with those remittances when filing the annual tax return for that year. It’s an efficient system, but it’s also one largely invisible to the employee, and certainly one which operates without the need for the employee to take any steps on his or her own. When someone’s working life ends and retirement begins, it’s consequently not surprising that the individual wouldn’t know that it is now his or her responsibility to make specific arrangements for the payment of income tax.

Adding to the potential confusion, most employees who are now moving into retirement have had only a single source of income throughout their working lives. Once in retirement, however, there are likely multiple such sources of income, including Canada Pension Plan benefits and Old Age Security payments, and perhaps monthly amounts received from an employer-sponsored registered pension plan (RPP) or a registered retirement income fund (RRIF). Unless the individual so directs, none of the payors of those kinds of income will deduct income tax from the payments and remit them to the federal government on the individual’s behalf.

Canadian tax rules provide that, where the amount of tax owed when a return is filed by the taxpayer is more than $3,000 ($1,800 for Quebec residents) in the current (2017) year and either of the two previous (2015 and 2016) years, that taxpayer may be required to pay income tax by instalments.

The reason that first instalment reminders are issued in August has to do with the schedule on which Canadians file their tax returns. The amount of tax payable on filing for the immediately preceding year can’t be known until the tax return for that year has been filed and assessed, and the tax return filing deadline for individuals is April 30 (or June 15 for self-employed taxpayers and their spouses). Consequently, by the end of July, the CRA will have the information needed to determine whether a particular taxpayer should receive a first instalment reminder for the current year. In many cases, a first instalment reminder is triggered where an individual who has retired within the past two years, as in the following example.

An individual retires at the end of 2015 from employment in which tax deductions were automatically taken from his or her paycheque. Beginning in January 2016, that individual’s sources of income change from a single paycheque from their employer to Canada Pension Plan and Old Age Security benefits, as well as a monthly withdrawal from a RRIF. In order for the individual to have the appropriate amounts of tax withheld from those income sources during 2016, the individual taxpayer would have to have calculated the amount of total tax liability for the year and made arrangements for the appropriate amount to be withheld from one or more of those three sources of income. For most taxpayers, especially those who are making all the various adjustments needed to move from working life into retirement, and who have never before needed to make such a calculation, that’s not a very likely scenario. Consequently, it would be very unlikely that withholdings in the correct amount (or any withholdings at all) would be made from those sources of retirement income, and very likely that more than $3,000 in tax will be owed when the return for 2016 is filed. Where the taxpayer’s income levels and withholding amounts are unchanged for 2017 and it can be expected that, once again, more than $3,000 will be owed on filing, the criteria for the instalment requirement would be met and a tax instalment reminder would be issued in August 2017, after the return for 2016 is assessed.

Taxpayers who receive that first Instalment Reminder in August may also be puzzled by the fact that it is a “Reminder” and not a “Requirement” to pay. The reason for that is that those who receive it are not actually required by law to make instalment payments of tax. There are, in fact, three options open to the taxpayer who receives an Instalment Reminder.

First, the taxpayer can pay the amounts specified on the reminder, by the respective due dates of September 15 and December 15. A taxpayer who does so can be certain that he or she will not have to pay any interest or penalty charges even if he or she does have to pay an additional amount on filing in the spring of 2018. If the instalments paid turn out to be more than the taxpayer’s tax liability for 2017, he or she will of course receive a refund on filing.

Second, the taxpayer can make instalment payments based on the total amount of tax which was owed and paid for the 2016 tax year. Where a taxpayer’s income has not changed between 2016 and 2017 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2017 will be the same or slightly less than it was in 2016, owing to the indexation of tax brackets and tax credit amounts.

All of this may seem like a lot of research and calculation effort, especially when one considers that many Canadians don’t even prepare their own tax returns. And those who don’t want to be bothered with the intricacies of tax calculations can pay the amounts set out in the Instalment Reminder, secure in the knowledge that they will not incur any penalty or interest charges and that, should those amounts ultimately represent an overpayment of taxes, that overpayment will be recovered and refunded when the 2017 return is filed next spring.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

The traditional idea of retirement – working full-time until age 65 and then leaving the workforce completely to live on government-sponsored and private sources of retirement income – has undergone a lot of changes over the past couple of decades, and Canada’s government-sponsored retirement income system has evolved in response. Generally, the changes to the Canada Pension Plan (CPP) and Old Age Security (OAS) programs have increased the flexibility of those programs and, in particular, have given individuals a greater range of choices with respect to, especially, the timing of their receipt of CPP and OAS.

The traditional idea of retirement – working full-time until age 65 and then leaving the workforce completely to live on government-sponsored and private sources of retirement income – has undergone a lot of changes over the past couple of decades, and Canada’s government-sponsored retirement income system has evolved in response. Generally, the changes to the Canada Pension Plan (CPP) and Old Age Security (OAS) programs have increased the flexibility of those programs and, in particular, have given individuals a greater range of choices with respect to, especially, the timing of their receipt of CPP and OAS.

The downside of that increased flexibility has been to make the system — and therefore the choices available to Canadians — more complex. One aspect of that complexity is the (relatively) new CPP post-retirement benefit, or PRB.

The CPP system is a contributory one, in which both the individual and his or her employer make annual contributions, with the amount of those contributions based on the employee’s income for that year. The total of contributions made between the time the individual is age 18 and the time he or she begins receiving CPP retirement benefits is used to calculate the amount of the monthly CPP retirement benefit to which that individual is entitled. An individual can begin receiving his or her CPP retirement benefit at the age of 60 or can defer receipt anytime until he or she turns 70 years of age. With each month that receipt of the benefit is deferred, the amount of that benefit increases.

It was once the case that an individual who had decided to begin receiving the CPP retirement benefit was not required (or allowed) to continue contributing to the CPP (even if he or she continued to work) and therefore had no means of increasing the benefit amount. A change made in 2012 altered that rule, such that individuals who continued to work while receiving the CPP retirement benefit could also continue to contribute to the CPP and, as a result, increase the amount of CPP retirement benefit they received each month. That benefit is the CPP post-retirement benefit or PRB.

The rules governing the PRB differ, depending on the age of the taxpayer. In a nutshell, an individual who has chosen to begin receiving the CPP retirement benefit but who continues to work will be subject to the following rules:

Individuals who are 60 to 65 years of age and continue to work are required to continue making CPP contributions.

Individuals who are 65 to 70 years of age and continue to work can choose not to make CPP contributions. To stop contributing, such an individual must fill out Form CPT30, Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election. A copy of that form must be given to the individual’s employer and the original sent to the Canada Revenue Agency (CRA). An individual who has more than one employer must make the same choice (to continue to contribute or to cease contributions) for all employers and must provide a copy of Form CPT30 to each.

A decision to stop contributing can be changed, and contributions resumed, but only one change can be made per calendar year. To make that change, the individual must complete section D of Form CPT30, give one copy of the form to his or her employer, and send the original to the CRA.

Individuals over the age of 70 and are still working cannot contribute to the CPP.

Overall, the effect of these new rules is that CPP retirement benefit recipients who are still working and under age 65, as well as those who are between 65 and 70 and choose not to opt out, will continue to make contributions to the CPP system and continue therefore to earn new credits under that system. As a result, the amount of retirement benefits which they are entitled to will increase with each year’s contributions.

Where an individual makes CPP contributions while working and receiving CPP retirement benefits, the amount of any CPP post-retirement benefit earned will automatically be calculated by the federal government, and the individual will be advised of any increase in that monthly CPP retirement benefit each year. The PRB will be paid to that individual automatically the year after the contributions are made, effective January 1st of every year. Since the federal government needs information about employer contributions made, the first annual payment of the PRB is usually issued in early April and will include a lump sum payment back to January. Thereafter, the PRB is paid monthly and the PRB amount is added to the individual’s CPP retirement pension and issued as a single payment.

While the rules governing the PRB can seem complex (and certainly the actuarial calculations are), the individual doesn’t have to be concerned with those technical details. For CPP retirement benefit recipients who are under age 65 or over 70, there is no decision to be made. For the former, CPP contributions will be automatically deducted from their paycheques and for the latter, no such contributions are allowed.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

While Canadians typically think of taxes only in the spring when the annual return must be filed, taxes are a year-round business for the Canada Revenue Agency (CRA). The CRA is busy processing and issuing Notices of Assessment for individual tax returns during the February to June filing season. To date, in 2017, the CRA has received and processed just under 28 million individual income tax returns. That volume of returns and the CRA’s self-imposed processing turnaround goals (two to six weeks, depending on the filing method) mean that the CRA cannot possibly do an in-depth review of each return filed prior to issuing the Notice of Assessment.

While Canadians typically think of taxes only in the spring when the annual return must be filed, taxes are a year-round business for the Canada Revenue Agency (CRA). The CRA is busy processing and issuing Notices of Assessment for individual tax returns during the February to June filing season. To date, in 2017, the CRA has received and processed just under 28 million individual income tax returns. That volume of returns and the CRA’s self-imposed processing turnaround goals (two to six weeks, depending on the filing method) mean that the CRA cannot possibly do an in-depth review of each return filed prior to issuing the Notice of Assessment.

As well, for many years the CRA has been encouraging taxpayers to fulfill their filing obligations online, through one of the Agency’s e-filing services. Canadians are clearly listening, as just over 24 million (or 86%) of the returns filed this year were filed by electronic means. While e-filing means that the turnaround for processing of returns is much quicker, there is, by definition, no paper involved. The Canadian tax system has always been what is termed a “self-assessing” system, in which taxpayers report income earned and claim deductions and credits to which they believe they are entitled. Prior to the advent of e-filing there were means by which the CRA could easily verify claims made by taxpayers. Where returns were paper-filed, taxpayers were usually required to include receipts or other documentation to prove their claims, whatever those claims were for. For the 86% of returns which were filed this year by electronic means, no such paper trail exists. Consequently, the potential exists for misrepresentation of such claims (or simple reporting errors) on a large scale. The CRA’s response to that risk is to carry out a post-assessment review process, in which the Agency asks taxpayers to back up or verify claims for credits or deductions which were made on the return filed this past spring.

That post-assessment review process starts in the month of August. There are two components to the review process — the Processing Review Program and the Matching Program. The former is a review of various deductions or credits claimed on returns, while the latter compares information included on the taxpayer’s return with information provided to the CRA by third-party sources, like T4s filed by employers or T5s filed by banks or other financial institutions.

Being selected for review under either program means, for the individual taxpayer, the possibility of receiving unexpected correspondence from the CRA. Receiving such correspondence from the tax authorities is almost guaranteed to unsettle the recipient taxpayer, even where there’s no reason to believe that anything is wrong. But, it’s an experience which will be shared this summer and fall by millions of Canadian taxpayers.

While the two programs are carried out more or less concurrently, they are quite different. The Processing Review Program asks the taxpayer to provide verification or proof of deductions or credits claimed on the return, while the Matching Program deals with discrepancies between the information on the taxpayer’s return and information filed by third parties with respect to the taxpayer’s income or deductions for the year.

Of course, most taxpayers are not concerned so much with the kind or program or programs under which they are contacted as they are with why their return was singled out for review. Many taxpayers assume that it’s because there is something wrong on their return, or that the letter is a precursor to an audit, but that’s not necessarily the case. Returns are selected by the CRA for post-assessment review for a number of reasons. Under the Matching Program, where a taxpayer has filed a return containing information which does not agree with the corresponding information filed by, for instance, his or her employer, it’s likely that the CRA will want to follow up to find out the reason for the discrepancy. As well, Canada’s tax laws are complex and, over the years, the CRA has determined that there are areas in which taxpayers are more likely to make errors on their returns. Consequently, a return which includes claims in those areas (like medical expenses, support payments, and legal fees) may have an increased chance of being reviewed. Where there are deductions or credits claimed by the taxpayer which are significantly different or greater than those claimed in previous returns, that may attract the CRA’s attention. And, if the taxpayer’s return has been reviewed in previous years and, especially, if an adjustment was made following that review, subsequent reviews may be more likely. Finally, many returns are picked for post-assessment review simply on a random basis.

Regardless of the reason for the follow-up, the process is the same. Taxpayers whose returns are selected for review will receive a letter from the CRA, identifying the deduction or credit for which the CRA wants documentation or the income or deduction amount about which a discrepancy seems to exist. The taxpayer will be given a reasonable period of time — usually a few weeks from the date of the letter — in which to respond to the CRA’s request. That response should be in writing, attaching the receipts or other documentation (if needed) which the CRA has requested. All correspondence from the CRA under its review programs will include a reference number, which is usually found in the top right hand corner of the CRA’s letter. That number is the means by which the CRA tracks the particular inquiry, and should be included in the response sent to the Agency. It’s important to remember, as well, that it’s the taxpayer’s responsibility to provide proof, where requested, of any claims made on a return. Where a taxpayer does not respond to a CRA request and does not provide such proof, the Agency will proceed on the basis that the requested verification or proof does not exist, and will reassess accordingly.

Taxpayers who have registered for the CRA’s online tax program My Account (or whose representative is similarly registered for the CRA’s Represent a Client online service) can submit required documentation electronically. More information on how to do so can be found on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rvws/sbmttng-eng.html.

Regardless of how requested documents are submitted, it’s possible that the CRA will send a follow-up letter, or the taxpayer may be contacted by telephone, with a request from the CRA for more information.

One word of caution — as most Canadians have heard by now, there is a persistent tax scam operating in which taxpayers are contacted by telephone by someone falsely claiming to be from the CRA (or, more recently, from the “Federal Tax Court”, which does not exist). Such fraudulent callers generally indicate that a review of the taxpayer’s return shows that additional taxes are owed, and insist that immediate payment is required, by wire transfer of funds or pre-paid credit card. Taxpayers should be aware that payment of taxes is never requested in this way, or by either of those methods. While the CRA can and does contact taxpayers by phone, any CRA representative will have the reference number which appeared in the CRA’s initial letter and should be prepared to quote that number to the taxpayer in order to establish that the call is an authentic one. As well, the CRA does not correspond with taxpayers on confidential tax matters by e-mail. The only legitimate e-mail which a taxpayer might receive from the CRA is one which advises that there is a new message for that taxpayer in his or her online account with the CRA — and only taxpayers who have previously registered for the CRA’s My Account service would receive such an e-mail. Any other type of e-mail claiming to be from the CRA is not legitimate and should be deleted without opening.

Whatever the reason a particular return was selected for post-assessment review by the CRA, one thing is certain. A prompt response to the CRA’s enquiry, providing them with the information or documentation requested will, in the vast majority of cases, bring the matter to a speedy conclusion, to the satisfaction of both the Agency and the taxpayer.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

The Bank of Canada’s recent decision to raise interest rates generated a lot of media attention, for the most part because while the increase itself was only one quarter of a percentage point, it was the first move made by the Bank of Canada to increase rates in the past seven years. Much of the media coverage of the rate change centered around the effect that change might or might not have on the current real estate market. One of the issues under discussion was whether this or future increases in interest rates (and therefore mortgage rates) would act as a barrier to those seeking to get into the housing market. And a phrase that was prominent in that discussion — the mortgage financing “stress test” — is likely one that is unfamiliar to most Canadians, even those who are affected by it.

The Bank of Canada’s recent decision to raise interest rates generated a lot of media attention, for the most part because while the increase itself was only one quarter of a percentage point, it was the first move made by the Bank of Canada to increase rates in the past seven years. Much of the media coverage of the rate change centered around the effect that change might or might not have on the current real estate market. One of the issues under discussion was whether this or future increases in interest rates (and therefore mortgage rates) would act as a barrier to those seeking to get into the housing market. And a phrase that was prominent in that discussion — the mortgage financing “stress test” — is likely one that is unfamiliar to most Canadians, even those who are affected by it.

When anyone seeks to borrow money, for whatever purpose, a key factor in whether they will be able to obtain a loan is, of course, their ability to repay the loan on the terms set, including the interest rate to be levied. That same consideration applies when an individual or a couple apply for approval or pre-approval of a mortgage. However, a mortgage differs from other kinds of consumer debt in a few significant ways. First, a mortgage is likely to be the largest debt any Canadian takes on in his or her lifetime. Second, a mortgage is paid off over a much longer period of time — typically 25 years — than any other type of debt. And, finally, because of that lengthy repayment period, a mortgage is the only kind of significant consumer debt in which the interest rate which will be payable over the entire life of the loan can’t be determined prior to the time the initial financing is approved.

When mortgage financing is provided to a home buyer, there are two factors, besides the amount of the loan, which determine how much the monthly mortgage payments will be. The first is the amortization period, or the length of time over which the mortgage loan will be repaid. The second is the mortgage term, which is the time period for which the interest rate for the mortgage is fixed. That term is always shorter than the amortization period – for most mortgage financing in Canada, the longest term which can be obtained is 10 years, although most mortgage terms are shorter than that. Since the interest rate for that term is fixed, both the borrower and the lender know how much the mortgage payments will be for the entire length of that term and what percentage of the borrower’s current income will be required to make those payments.

In determining whether a borrower will be able to repay the mortgage loan as required, mortgage lenders rely on two debt-to-income ratios, known as Gross Debt Service (GDS) and Total Debt Service (TDS). The two are similar, but not the same.

The GDS ratio measures how much of the would-be borrower’s income will be needed to meet his or her housing costs. For any particular mortgage borrower, GDS represents the total of mortgage payments, property taxes, heating costs, and — where applicable — one-half of condo fees. Optimally, that total figure will represent less than 35% of the would-be borrower’s income.

Of course, most Canadians carry one or more kinds of consumer debt besides their mortgages, and so it’s necessary to determine their cost of servicing that total debt as a percentage of income. That figure is their TDS, which is the total of housing expenses (as calculated for purposes of GDS) plus any other debt repayment, including car loans, credit cards, lines of credit, and student loans. Optimally, the total amount of housing costs plus other repayment will be less than 42% of the would-be borrower’s income.

Where a would-be borrower is particularly credit-worthy (e.g., he or she has a reliable source of income and a good credit history), lenders will provide mortgage financing even where the optimal debt ratios indicated above are exceeded. However, the maximum GDS and TDS ratios allowed are, respectively, 39% and 44%.

While the GDS and TDS ratios do provide a reasonable measure of the ability of a prospective borrower to repay funds advanced to him or her, the weakness of those ratios are that they provide only a “snapshot” of the individual’s housing costs and debt repayment costs at a particular point in time and, more significantly, at current interest rates. As everyone knows, interest rates in Canada are, and have been for several years, at or near records lows and that many Canadians have taken advantage of those low rates. Specifically, as of the first quarter of 2017, the average debt load of Canadian households (including mortgage debt) stood at 167.3% of disposable income.

The combination of those two factors means that Canadian households are, on average, carrying much higher levels of debt (as a percentage of disposable income) and that the cost of carrying such debt is at or near record lows. When, as has recently proven the case, those interest rates begin to rise, such increase has the potential to put Canadian households on financial thin ice. And that possibility is what gave rise to the introduction by the federal government of the “stress test” which might equally well be called the “what-if?” test.

It’s possible to purchase a home in Canada with a down payment of 5%, where the cost of the home is $500,000 or less. Where the purchase price of the home is over $500,000, the minimum down payment is 5% for the first $500,000, and 10% for the remaining portion. However, regardless of the cost of the home, where the total down payment to be made is less than 20% of the purchase price, mortgage loan insurance is required, and such insurance is provided by a federal government agency, the Canada Mortgage and Housing Corporation (CMHC). As of the fall of 2016, all new prospective mortgage loans which must obtain mortgage loan insurance through CMHC (i.e., all those with less than 20% down payment) are subject to the new “stress test” requirement.

Basically, the stress test requires that lenders assess a would-be mortgage borrower’s ability to manage their debt, not only at current interest rates, but at the higher rates which those borrowers will certainly face sometime during the life of their mortgage. Carrying out a stress test is, in fact, something which financial planners advise clients to do as part of financial planning whenever taking on debt is contemplated. It’s simply prudent (especially where debt is longer term in nature and consequently higher payments resulting from an increase in interest rates is inevitable) to consider, not just whether the debt is manageable at current interest rates, but whether it will remain manageable where those interest rates rise by 1, 2, or 3% — or more. The “stress test” simply creates a requirement out of something that was always a good idea.

Under the stress test, for borrowers to qualify for mortgage insurance through CMHC, their GDS and TDS debt-servicing ratios must be no higher than the maximum allowable levels when calculated using the greater of the rate provided to them by their lender or the Bank of Canada’s conventional five-year posted rate. That Bank of Canada rate is typically higher than the rate that mortgage borrowers actually pay. For instance, the lowest five-year fixed rate mortgage interest rate offered by a major Canadian bank as of the end of July was 2.59%. At the same time, the Bank of Canada five-year posted rate was 4.84%.

It’s true that the application of the “stress test” as interest rates rise will cause more borrowers to be unable to qualify for a mortgage, or will require them to reduce their expectations in terms of the amount of mortgage financing for which they can qualify. But, it’s also the case that would-be borrowers who cannot “pass” a stress test are the very borrowers who would be put most at risk by an increase in interest rates. Where interest rates will be a year or two from now is something that no one — including the Bank of Canada — knows. It is undoubtedly disappointing for would-be borrowers to have to reduce their expectations with respect to the amount of mortgage financing (and therefore the “amount” of house) they can obtain. That scenario is, however, infinitely preferable to one in which they discover down the road that they can no longer afford to carry their mortgage at the higher interest rates then in effect, and are at risk of defaulting on that mortgage and potentially losing their home.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

For most Canadians, having to pay for legal services is an infrequent occurrence, and most Canadians would like to keep it that way. In many instances, the need to seek out and obtain legal services (and to pay for them) is associated with life’s more unwelcome occurrences and experiences — a divorce, a dispute over a family estate, or a job loss. About the only thing that mitigates the pain of paying legal fees (apart, hopefully, from a successful resolution of the problem that created the need for legal advice) would be being able to claim a tax credit or deduction for the fees paid.

For most Canadians, having to pay for legal services is an infrequent occurrence, and most Canadians would like to keep it that way. In many instances, the need to seek out and obtain legal services (and to pay for them) is associated with life’s more unwelcome occurrences and experiences — a divorce, a dispute over a family estate, or a job loss. About the only thing that mitigates the pain of paying legal fees (apart, hopefully, from a successful resolution of the problem that created the need for legal advice) would be being able to claim a tax credit or deduction for the fees paid.

Unfortunately, while there are some circumstances in which such a deduction can be claimed, those circumstances don’t usually include the routine reasons — purchasing a home, getting a divorce, establishing custody rights, or seeking legal advice about the disposition of a family estate — for which most Canadians incur legal fees. Generally, personal (as distinct from business-related) legal fees become deductible for most Canadian taxpayers only where they are seeking to recover amounts which they believe are owed to them, particularly where those amounts involved employment or employment-related income or, in some cases, family support obligations.

The first situation in which legal fees paid may be deductible is that of an employee seeking to collect (or to establish a right to collect) salary or wages. In all Canadian provinces and territories, employment standards laws provide that an employee who is about to lose his or her job (for reasons not involving fault on the part of the employee) is entitled to receive a specified amount of notice, or salary or wages equivalent to such notice. In many cases, however, the employee can establish a right to a period of notice (or payment in lieu) greater than the statutory minimum. The amount of notice or payment in lieu of notice which is payable can then become a matter of negotiation between the employer and its former employee, and such negotiations usually involve legal representation and, consequently, legal fees. In that situation, legal fees incurred by the employee to establish a right to amounts allegedly owed by the employer are deductible by that former employee. If a court action is necessary and the Court requires the employer to reimburse its former employee for some or all of the legal fees incurred, the amount of that reimbursement must be subtracted from any deduction claimed. In other words, the former employee can claim a deduction only for legal fees which he or she was personally required to pay and for which he or she was not reimbursed.

In some situations, an employee or former employee seeks legal help in order to collect or to establish a right to collect a retiring allowance or pension benefits. In such situations, the legal fees incurred can be deducted, up to the total amount of the retiring allowance or pension income actually received for that year. Where part of the retiring allowance or pension benefits received in a particular year is contributed to an RRSP or registered pension plan, the amount contributed must be subtracted from the total amount received when calculating the maximum allowable deduction for legal fees. However, where all legal fees incurred can’t be claimed in the current year, they can be carried forward and claimed on the return for any of the 7 subsequent tax years.

The rules covering the deduction of legal fees incurred where an employee claims amounts from an employer or former employer are relatively straightforward. The same, unfortunately, cannot be said for the rules governing the deductibility of legal fees paid in connection with family support obligations. Those rules have evolved over the past number of years in a somewhat piecemeal fashion. The current rules are as follows.

Legal fees incurred by either party in the course of negotiating a separation agreement or obtaining a divorce are not deductible. Such fees paid to establish child custody or visitation rights are similarly not deductible by either parent.

Where, however, one former spouse has the right to receive support payments from the other, there are circumstances in which legal fees paid in connection with that right are deductible. Specifically, legal fees paid for the following purposes will be deductible by the person receiving those support payments:

collecting late support payments;

establishing the amount of support payments from a current or former spouse or common-law partner;

establishing the amount of support payments from the legal parent of that person’s child (who is not a current or former spouse or common-law partner). However, in these circumstances the deduction is allowed only where the support is payable under a court order, not simply under the terms of an agreement between the parties;

seeking an increase in support payments; or

seeking an order making child support amounts received non-taxable.

On the payment side of the support payment/receipt equation, the situation is not so favourable, as a deduction for legal fees incurred will not generally not be allowed to a person paying support. More specifically, as outlined on the Canada Revenue Agency (CRA) website, a person paying support cannot claim legal fees incurred in order to “establish, negotiate or contest the amount of support payments”.

Finally, where the CRA reviews or challenges income amounts, deductions, or credits reported or claimed by a taxpayer for a tax year, any fees (which in this case includes accounting fees) paid for advice or assistance in dealing with the CRA’s review, assessment or reassessment, or in objecting to that assessment or reassessment, can be deducted by the taxpayer. A deduction can similarly be claimed where the taxpayer incurs such fees in relation to a dispute involving employment insurance, the Canada Pension Plan or the Quebec Pension Plan.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.